1 IN THE DISTRICT COURT OF TULSA COUNTYIN THE DISTRICT...

1 IN THE DISTRICT COURT OF TULSA COUNTYIN THE DISTRICT COURT OF TULSA COUNTYIN THE DISTRICT COURT OF TULSA COUNTYIN THE DISTRICT COURT OF TULSA COUNTY

2 STATE OF OKLAHOMASTATE OF OKLAHOMASTATE OF OKLAHOMASTATE OF OKLAHOMA

3

4 BETTINA M. WHYTE, BETTINA M. WHYTE, BETTINA M. WHYTE, BETTINA M. WHYTE, ) ) ) ) ))))

5 PlaintiffPlaintiffPlaintiffPlaintiff,,,, )))) VS.VS.VS.VS. ) ) ) ) Case No. Case No. Case No. Case No.

6 ) CJ ) CJ ) CJ ) CJ-2010--2010--2010--2010-4042 4042 4042 4042 ) ) ) )

7 PRICEWATERHOUSECOOPERS, LLC, ) PRICEWATERHOUSECOOPERS, LLC, ) PRICEWATERHOUSECOOPERS, LLC, ) PRICEWATERHOUSECOOPERS, LLC, ) ) ) ) )

8 Defendant. Defendant. Defendant. Defendant. ) ) ) )

9 ____________________________________________________________________________________________________________________________________________________________________________________________________________________

10 TRANSCRIPT OF PROCEEDINGSTRANSCRIPT OF PROCEEDINGSTRANSCRIPT OF PROCEEDINGSTRANSCRIPT OF PROCEEDINGS

11 HAD HAD HAD HAD ON ON ON ON JANUARY 17, 2014 JANUARY 17, 2014 JANUARY 17, 2014 JANUARY 17, 2014

12 BEFORE THE HONORABLE DANA L. KUEHNBEFORE THE HONORABLE DANA L. KUEHNBEFORE THE HONORABLE DANA L. KUEHNBEFORE THE HONORABLE DANA L. KUEHN

13 DISTRICT JUDGE IN AND FOR TULSA COUNTYDISTRICT JUDGE IN AND FOR TULSA COUNTYDISTRICT JUDGE IN AND FOR TULSA COUNTYDISTRICT JUDGE IN AND FOR TULSA COUNTY

14 TULSA, OKLAHOMATULSA, OKLAHOMATULSA, OKLAHOMATULSA, OKLAHOMA

15

16 _____________________________________________________

17

18

19

20

21

22 Reported byReported byReported byReported by::::

23 Diana Cavenah, CSR-RPRDiana Cavenah, CSR-RPRDiana Cavenah, CSR-RPRDiana Cavenah, CSR-RPR Official Court Reporter, #01524Official Court Reporter, #01524Official Court Reporter, #01524Official Court Reporter, #01524

24 500 South Denver500 South Denver500 South Denver500 South Denver Tulsa, Oklahoma 74103Tulsa, Oklahoma 74103Tulsa, Oklahoma 74103Tulsa, Oklahoma 74103

25

DISTRICT COURT OF OKLAHOMA - OFFICIAL TRANSCRIPT

2

1 AAAA P P E A R A N C E S P P E A R A N C E S P P E A R A N C E S P P E A R A N C E S

2 ON BEHALF OF THE PLAINTIFF:

3 MR. DAVID E. KEGLOVITS

4 MS. AMELIA A. FOGLEMAN Attorneys at Law

5 1100 ONEOK Plaza 100 West Fifth Street

6 Tulsa, OK 74103-4217

7 AND

8 MR. BRIAN TIMMONS Attorney at Law

9 865 South Figueroa Street Tenth Floor

10 Los Angeles, CA 90017

11 AND

12 MR. TERRY L. WIT Attorney at Law

13 50 California Street, 22nd Floor San Francisco, CA 94111

14

15

16 ON BEHALF OF THE DEFENDANT:

17 MS. MARY QUINN COOPER Attorney at Law

18 1717 South Boulder Avenue, Suite 900 Tulsa, OK 74119

19 AND

20 MR. GABOR BALASSA

21 MS. EMILY NICKLIN MR. JOSHUA Z. RABINOVITZ

22 Attorneys at Law 300 North LaSalle

23 Chicago, IL 60654

24

25


3

1 P R O C E E D I N G S

2 THE COURT: Welcome. This is officially

3 Tulsa County District Court this morning. I'm glad

4 everyone that's here is here to listen. If you're a

5 student and you are here to listen, congratulations

6 for taking a chance to be here and have this

7 opportunity to listen to who I think are some of the

8 most outstanding lawyers in the State, and then we

9 have some lawyers from out of state as well, who are

10 extremely qualified and give outstanding legal

11 arguments. I have already heard them do so many

12 times and it's always a learning experience to come

13 and listen to attorneys applying what you're

14 learning, so thank you for being here.

15 If you are a student and on a break, if the

16 attorneys can answer questions during breaks, they

17 will. I have to warn you, I'm sure you'll understand

18 that they are in the middle of working. So during

19 breaks this morning they might be busy trying to get

20 some things done, but they have promised me that at

21 the conclusion of the hearing today, they are more

22 than willing to answer any questions or have any

23 discussions with any of the students that are here,

24 and I'll make sure I keep announcing that because I

25 know the dean said there is Bar Review going on this


4

1 morning for a little bit and a lot of students are

2 coming after that, so I'll continue to make these

3 announcements as we go along today.

4 What I would like to do first is have all of

5 the attorneys stand up and just say your name and

6 introduce yourself, what firm you're with or where

7 you're from so that everyone in the audience can

8 know, and then we're going to get started.

9 The way this is going to work today for all

10 of you that are here to listen is there are summary

11 judgment briefs filed by both parties in this case.

12 How we're going to proceed is I am going

13 to -- just so the attorneys know, I am going to take

14 arguments by the sections of their briefs, so we'll

15 start out let's say with the Defendant's motion for

16 summary judgment, which is -- has a lot of sections

17 to it, and we'll announce what legal theory we'll be

18 discussing. The attorneys will each get to make

19 argument, I'll be asking them questions, and then

20 we'll move on to the next section of legal argument.

21 So I'll always let you know what legal argument we're

22 talking about or legal claim that we're talking

23 before we proceed.

24 And as we did before in the expert hearing --

25 we had a Daubert hearing earlier -- I am just going


5

1 to let the attorneys kind of sum up the issue for me.

2 I'll interrupt you if I don't need any further

3 clarification or I might ask some questions if I

4 don't understand your argument. And I promise, I

5 will let both sides have their say, so it might feel

6 like I am just talking to one side for a while, but

7 that doesn't mean I'm ignoring the other side; it

8 might just be that I really want them to answer the

9 question, because I already know what your answer is

10 from your brief or your other legal argument, so -- I

11 think it went well that way.

12 So we'll just start with the Plaintiff's

13 attorneys. They are here for Bettina Whyte, who is

14 the trustee for SemGroup, their litigation trust,

15 which can be kind of confusing. You think why isn't

16 it SemGroup vs. PricewaterhouseCoopers; because it is

17 a litigation trust and Bettina Whyte is the trustee,

18 so she is the Plaintiff.

19 So, Gentlemen, Ladies, do you want to

20 introduce yourself? Thank you very much.

21 MR. KEGLOVITS: Thank you, Your Honor. I am

22 Dave Keglovits with the Gable Gotwals' firm.

23 MS. FOGLEMAN: I am Amy Fogleman with Gable

24 Gotwals.

25 MR. TIMMONS: I am Brian Timmons with Quinn


6

1 Emanuel.

2 MR. WIT: Terry Wit, Quinn Emanuel.

3 THE COURT: Yes. This is from the Defendant,

4 PricewaterhouseCoopers, Ms. Mary Quinn Cooper.

5 MS. COOPER: Yes, Your Honor. Mary Quinn

6 Cooper from McAfee Taft here in Tulsa. And, Your

7 Honor, may I also introduce Ted Singer, who is with

8 the office of general counsel for

9 PricewaterhouseCoopers.

10 THE COURT: Okay. Welcome, sir. I'm sorry.

11 I didn't know you were here. I am glad you're here.

12 Thank you.

13 MS. NICKLIN: And I am Emily Nicklin. I'm

14 with the law firm of Kirkland & Ellis for


16 MR. BALASSA: Good morning. Gabor Balassa

17 with Kirkland & Ellis.

18 MR. RABINOVITZ: And Josh Rabinovitz with

19 Kirkland & Ellis from Chicago.

20 THE COURT: Wonderful. Thank you all very

21 much.

22 I've been teasing the lawyers this whole

23 time, because after you turn 40, things happen, and

24 after you have a case like this and you're the judge

25 and you don't think you're going to have to read as


7

1 much as you have to in law school, but you get a case

2 like this, you get these. So I have my Sally Jessy

3 Raphael reading glasses on. My husband bought these

4 for me for Christmas and I didn't have the heart to

5 tell him that's what I thought of when I saw them, so

6 I just wear them.

7 Okay. So we're going to go ahead and get

8 started.

9 I would like to start first with the

10 Defendant's motions for summary judgment. Excuse me,

11 the Plaintiff's motions for summary judgment, because

12 the Defendant just has their one.

13 MS. COOPER: The Plaintiff's.

14 THE COURT: No. I'm sorry, the Plaintiff's.

15 Excuse me. Yeah.

16 We're going to start -- what I did is, just

17 so the attorneys know, I printed off the table of

18 contents for both of your -- for the motion and then

19 the response. And, for instance, it says summary

20 judgment issue number one, Plaintiff's claims for

21 consequential damages are barred by contract. So

22 that first issue raised by the Defendant is where

23 we're going to start.

24 So, are you guys going to have one person

25 argue or are you going to announce who's arguing each


8

1 issue?

2 MS. COOPER: Yeah, Your Honor. Mr. Balassa

3 is going to argue that issue for the Defendant.

4 THE COURT: Okay. Wonderful.

5 Sir, whenever you are ready, you can proceed,

6 and if -- I said this earlier, if the attorneys can

7 argue from the podium. I think that way everyone can

8 hear what you have to say.

9 MR. BALASSA: Your Honor, I have a binder

10 that I'd like to approach --

11 THE COURT: Sure.

12 MR. BALASSA: -- and hand to the Court.

13 THE COURT: Thank you very much.

14 And I'd also like any of the students to

15 know -- of course, I mean, I know we have some

16 lawyers here from town. If we're on breaks and you

17 can't see something --

18 Are they projecting it over there?

19 Okay. Good.

20 If you do want to see anything else that's in

21 the binders exhibit-wise, you can feel free to

22 approach on breaks and I don't have a problem with

23 you coming to see it if you want to see something

24 again. Okay?

25 Yes, sir. Go ahead.


9

1 MR. BALASSA: Good morning, Your Honor.

2 THE COURT: Good morning.

3 MR. BALASSA: Are you able to see the screen?

4 THE COURT: Yes, I'm fine. Super reading

5 glasses. No, just kidding. And I do have this as

6 well. Is that in here what you're projecting?

7 MR. BALASSA: It is not in the binder.

8 THE COURT: Okay. All right.

9 MR. BALASSA: Well, let me be clear. The

10 underlying documents are in the binder --

11 THE COURT: Yes, sir.

12 MR. BALASSA: -- but I have excerpts. I'll

13 direct the Court to the underlying documents as I go

14 through.

15 THE COURT: If I can't see it very well, I'll

16 let you know and you can tell me where to go in the

17 book.

18 MR. BALASSA: Thank you, Judge.

19 THE COURT: Otherwise I can read that just

20 fine.

21 MR. BALASSA: We live in a litigious society,

22 no question about that, and that's why service

23 providers often insist on contract terms that would

24 limit their liability. That's why, for instance,

25 alarm companies will almost always include in their


10

1 contracts a liability-limiting provision, usually to

2 specify a liquidated damage amount, because they

3 can't possibly afford, in the event that they do

4 something wrong, to pay for the losses that might

5 result at the home.

6 Likewise, auditors couldn't possibly afford

7 to assume the risks of all possible misfortunes that

8 might befall a business in the event that there is a

9 problem with the audited financial statements, and

10 that's why auditors will often include provisions

11 limiting their liability, their potential exposure,

12 in the event of a lawsuit by a client.

13 Contractual provisions like this limiting

14 damages are enforceable in Oklahoma, especially in

15 cases either against the service provider or another

16 contracting party.

17 The Fretwell case is an illustration of that.

18 That's the Oklahoma Supreme Court case from 1988 that

19 involved a claim against an alarm company by a

20 homeowner, and that was a negligence claim, not a

21 breach of contract claim. The alarm company had

22 charged the customer $46 a month for the service,

23 but, not surprisingly, had a limitation on damages

24 provision limiting damages to $50.

25 The Plaintiff there was claiming damages


11

1 because a burglary had occurred, and the home had

2 suffered losses, the homeowner had suffered losses,

3 of over $90,000. And the Oklahoma Supreme Court held

4 that the limitation was enforceable and the

5 Plaintiff's damages were limited to the $50 cap that

6 was in the parties' contract.

7 Here, in this case, along with other terms

8 that define the parties' relationship, SemGroup and

9 PricewaterhouseCoopers, both highly sophisticated

10 parties, agreed before each annual audit to a

11 limitation on potential damages in the event of a

12 claim against PwC. And we have on the screen -- it's

13 also behind Tab No. 1, Page 3 of your binder,

14 Judge -- the language from that liability-limiting

15 provision.

16 Under the contract here, SemGroup, in whose

17 shoes the Plaintiff, the trust, stands in this

18 lawsuit, waived the right to seek from PwC

19 consequential, indirect, lost profit, or other

20 similar damages in a claim, whether a contract or in

21 tort or otherwise related to the audit services.

22 Now, the term here "consequential damages"

23 and also "indirect damages," they have a specialized

24 meaning under the law.

25 Article 15 of the Oklahoma statutes, of


12

1 course, provides the Court with a number of

2 interpretative guides, each provision providing

3 interpretative guide to the Court for how to

4 interpret statutes, a duty of the Court.

5 Section 161 speaks to technical words and

6 says the technical words should be interpreted as

7 they're usually understood by persons in the

8 profession or business to which they relate.

9 So what profession or business does

10 consequential damages relate? Well, it's

11 appropriate; we're in a law school today. It's the

12 legal profession, of course. These aren't scientific

13 terms, they're legal terms. And so the question is

14 how do lawyers, especially lawyers in Oklahoma where

15 this contract was entered into, interpret this term,

16 and courts -- lawyers would look to case law for

17 guidance on interpreting these terms.

18 And so we do the same here. We look to

19 cases. Not that, as Plaintiff has suggested in a

20 footnote, refer to other terms, like general versus

21 specific damages in cases that don't involve the

22 consequential damage limiting provisions.

23 But I submit to the Court, it's appropriate

24 to look to case law that actually does interpret

25 terms -- excuse me -- does interpret contractual


13

1 terms, like the one here that limit damages and

2 preclude recovery of consequential damages.

3 The first case, Your Honor, is the Penncro

4 case and that's in the binder that I handed up.

5 There is a highlighted copy.

6 This is a Tenth Circuit decision in a case

7 involving a claim between a service provider and

8 Sprint, the telecommunications company.

9 THE COURT: It's a breach of contract case;

10 correct?

11 MR. BALASSA: It is a breach of contract

12 case.

13 And in this case, the parties had a

14 contractual provision that prohibited recovery of

15 consequential damages, and -- I'll refer to the top

16 right-hand corner page number -- Page No. 5 in that

17 decision, the Court is discussing what the term

18 "consequential damages" means in that provision, in

19 the damages-limiting provision. And the Court there

20 said a couple of things.

21 First, with respect to direct damages, the

22 courts -- and I am reading here in the left-hand

23 column on Page 5 at 1156, there is a paragraph that

24 starts "the common legal meaning."

25 So what the Court does there is the same


14

1 thing that's instructed by the Oklahoma Statue 161

2 looks to the common legal meaning. The common legal

3 meaning of the terms confirms the Court's

4 interpretation.

5 Direct damages refer to those which the party

6 lost from the contract itself; in other words, the

7 benefit of the bargain. While consequential damages

8 means something different. Those refer to economic

9 harm that goes beyond the immediate scope of the

10 contract.

11 And that's -- that's theoretical, so the

12 Court provides an example. And the example the Court

13 provides a few sentences later, it says that -- the

14 Court says: If a services contract is breached and

15 the Plaintiff anticipated a profit under the

16 contract, then those profits would be recoverable as

17 a component of direct benefit of the bargain damages.

18 But by contrast, if the breach has a knock-on effect,

19 has a result that goes beyond the value of what's

20 being provided under the contract, that is

21 consequential. And the Court says if that same

22 breach had the knock-on effect of causing the

23 Plaintiff to close its doors, cause the Plaintiff to

24 go out of business, for instance, precluding it from

25 doing other work for which it had contracted from


15

1 someone else and, therefore, lost the downstream

2 profits, those lost profits might be recovered as

3 consequential damages. And so in the law, generally

4 a party -- an injured party can recover direct and

5 consequential damages. Here and in Penncro, that

6 wasn't the case. There was a limitation on

7 consequential damages.

8 And Penncro it's important also to note was a

9 summary judgment case. So there the -- and the trial

10 court had entered summary judgment in favor of the

11 Plaintiff below, and the Appellate Court, the Tenth

12 Circuit, affirmed, not kicking the issue to the jury,

13 but determining the meaning of a legal term,

14 according, as the Court said, the legal meaning of

15 the terms -- the common legal meaning of the terms.

16 And so we have the Court there drawing a

17 description between direct damages then for the

18 bargain and consequential damages, economic harm,

19 that goes beyond the immediate scope of the contract

20 for a breach that had a knock-on effect, for

21 instance, that causes the Plaintiff to close its

22 doors.

23 Next, Your Honor, I looked at the cases in

24 the Plaintiff's brief. And most of those cases, as I

25 mentioned already, those are cases that discuss


16

1 abstract definitions for general and special damages,

2 which are not terms in the contract here, in cases

3 that don't involve liability-limiting provisions.

4 But they do cite a case -- and it's from the Northern

5 District Court of Oklahoma -- that does involve a

6 liability-limiting provision, and that's the Aircraft

7 Services case, which is the first case, I believe, in

8 the binder that I handed you. It's the Aircraft

9 Fueling Services case.

10 And in that case, like in Penncro, the Court

11 determined, as a matter of law, what consequential

12 damages meant in the context of a liability-limiting

13 provision. And so this is Aircraft Fueling Services,

14 Northern District of Oklahoma, 2011. It's, I think,

15 the first case in the binder I handed up. And the

16 contract in that case, Judge, said neither party

17 shall be liable to the other party for consequential

18 damages arising from either party's performance. So

19 it's like the contract here.

20 And what was happening in that case is that

21 the Plaintiff had a damages expert, who was opining

22 on all kinds of damages, and the Defendant moved to

23 strike the -- those opinions of the damages expert on

24 the grounds that those categories of damages weren't

25 recoverable.


17

1 And the Court there -- if I can direct Your

2 Honor's attention to Pages 2 and 3 of the opinion.

3 Again, I'm referring to the top right-hand corner of

4 that case. So it's the Aircraft Services case, Page

5 2 and Page 3.

6 The Court goes through in numbered

7 paragraphs, starting on the left-hand side of Page 2,

8 the seven different categories of damages that the

9 Plaintiff was claiming and their damages expert was

10 opining on. And this was, again, a breach of

11 contract, and the Court -- where the natural -- under

12 Penncro, the direct damages would be the funds or the

13 value of the services that were to be provided.

14 But that's not what the Plaintiff's damages expert

15 was -- and Plaintiff were seeking. The Court

16 addressed things like, number one, as a result of the

17 Defendant's actions, the Plaintiff reduced its labor

18 force and incurred costs associated with that. The

19 Court said that's consequential.

20 Number two, the actions of the Defendant with

21 respect to the nonpayment of invoices that caused the

22 Plaintiff to be financially strapped and caused the

23 Plaintiff to miss out on some other opportunities, so

24 they lost an order under an existing government

25 contract, also consequential.


18

1 And the Court goes on. Number three is that the

2 alleged breach caused the Plaintiff to lose other

3 contracts and meant they had excess facilities, and

4 there were costs associated with that.

5 Also consequential, as a matter of law, all

6 the way down, four. Number five is suffering adverse

7 liquidity. Number seven is being unable to collect

8 on receivables from others. All seven categories of

9 the Plaintiff's claimed damages were deemed

10 consequential as a matter of law here, and that's at

11 Page 4. It's also star number -- pin site 4 where

12 the Court's addressing different bases for rejecting

13 these damage claims and says one basis is the damages

14 at issue are consequential damages -- I'm sorry --

15 that these damages recoveries is precluded under

16 Section 7A of the contract and that is the section

17 that prohibits consequential damages.

18 So we have the Northern District of Oklahoma

19 giving examples of consequential damages consistent

20 with Penncro which is the follow-on effects of the

21 breach.

22 THE COURT: And that's a breach of contract

23 case as well; correct?

24 MR. BALASSA: It is, Judge. And I will

25 address in a moment the distinction or lack of


19

1 distinction between a tort case in this context and a

2 breach of contract.

3 So I'll move briefly through one other case,

4 which is the Combustion Services case where the

5 Court -- that's the case cited by the Plaintiff for a

6 different proposition. It's not from -- it's from a

7 more far-flung jurisdiction than Penncro and Aircraft

8 Fueling. It's from the Eastern District of

9 Pennsylvania. And in that case, the Court also

10 decided the issue of the meaning of consequential

11 damages as a matter of law.

12 And the Court provides more useful

13 guidance -- this is at the Page 3, which is also pin

14 number three of Combustion Services -- where the

15 Court explains that in a normal scenario for lost

16 profit damages, the claim is that the buyer -- a

17 buyer contracts with a seller where the seller agrees

18 to deliver or manufacture a product. And the seller

19 in this hypothetical doesn't deliver and the buyer

20 misses out because they were going to resell that

21 product to someone else at a profit; and the Court

22 says that that is consequential damages.

23 Specifically, what the Court says is: Such

24 damages are consequential because they involve an

25 intervening factor, third-party purchasers, where


20

1 the -- where the aggrieved party, the buyer, has now

2 lost out on opportunity to sell to someone else.

3 That someone else is a third-party purchaser, which

4 the Court says is an intervening factor.

5 And the Court says further down that same

6 paragraph: The Defendant's failure to deliver

7 conforming goods is one step removed from the harm

8 and, therefore, is consequential.

9 So I've got up on the screen now Combustion

10 Services, and the Court actually goes on then to say

11 unpaid fees accruing under the contract, those are

12 direct, but consequential damages, those are damages

13 that involve an intervening fact or are one step

14 removed from the harm.

15 Now, I think to summarize these cases, direct

16 is recovering the value of what you were to receive

17 under the contract and consequential are the effects

18 to your business that flow from poor performance or

19 nonperformance of the contract.

20 Now, how does that apply here? Here we

21 have -- a direct damages claim here would be for the

22 value of what SemGroup was expecting to receive under

23 the contract, and that's usually measured by what is

24 being paid for those services or what it would cost

25 them to go out and hire someone else if, for example,


21

1 PricewaterhouseCoopers didn't show up or they wanted

2 a redo and had someone else perform an audit. They

3 could then measure the value of those services either

4 by what they paid PwC or the cost of going to someone

5 else.

6 But Plaintiff hasn't sought those damages

7 here. Instead, they have sought damages that fall

8 essentially into two buckets, according to their

9 damages expert: One are trading damages,

10 trading-related damages, and the other are

11 Westback-related damages. And both are

12 consequential, as both allege injuries to SemGroup

13 resulting from the alleged defective performance of

14 the audit, the downstream effect, the knock-on effect

15 of defective performance, rather than seeking the

16 benefit that's sought under the contract.

17 And so, with respect to trading, here I've

18 put up on the screen an excerpt -- and this is from

19 the Plaintiff's damages expert report, Paul

20 Carpenter, Paragraph 22. And to explain the

21 Plaintiff's trading theory of damages in one

22 paragraph requires eleven lines and four sentences

23 because it is so attenuated and there are so many

24 steps. And so we've tried to highlight to make it

25 easier to break this down and discuss it.


22

1 And the first step in the Plaintiff's trading

2 damages theory -- which, by the way, they say adds up

3 to 816 million dollars.

4 (Off the record.)

5 MR. BALASSA: 816. I didn't want to -- don't

6 want to overstate.

7 So the 816 million dollars in trading losses

8 they claim they would have avoided if SemGroup had

9 gone back earlier, here is their theory.

10 Number one, that lenders, a third party, someone

11 outside the contract, would have taken some action;

12 they would have terminated their relationship with

13 SemGroup.

14 Step number two involves SemGroup management

15 or, again, a third party, putting SemGroup into

16 bankruptcy rather than working -- working something

17 out with the lenders or with others.

18 But step number three is that as a

19 consequence of that step, the energy derivatives

20 trading activities at SemGroup would have ceased.

21 Then we look at number four, and number four is the

22 last piece. Number four shows that this theory is

23 based on market developments that happened after the

24 alleged breach of contract.

25 What they're saying in step number four,


23

1 they're pointing to the fact that SemGroup, after the

2 breach from which the damages expert is measuring

3 damages, which is March 28th of 2008, after that

4 time, they're saying SemGroup lost more than 800

5 million dollars on derivatives trades, which, of

6 course, are effected by the changes in the price of

7 oil.

8 And so what we have when you put it together

9 is a theory that if PricewaterhouseCoopers had

10 required additional disclosures, then these third

11 parties, the lenders, would have terminated their

12 relationship. But that's not it, that's not all.

13 Then the next in this chain is that would have

14 resulted in SemGroup seeking bankruptcy protection,

15 and then that would have stopped the trading

16 activities, and then, of course, the losses are

17 measured by the trading that -- the results of

18 trading from post-March 2006. This is anything but

19 direct.

20 And under Penncro, this isn't just the

21 knock-on effect, this is the knock on, to the knock

22 on, to the knock-on effect; far removed and

23 consequential, candidly, under any reasonable

24 definition of consequential damages.

25 So then -- that's not all they're seeking in


24

1 damages, of course. They also have a Westback

2 damages claim. And here it looks like the

3 Plaintiff's damages expert has gotten his theory --

4 or the Plaintiff's theory of causation into just one

5 sentence. And he says the first area of audit

6 failure -- he's referring to the Westback-related

7 disclosures -- meant the improper relationship

8 between Westback and SemGroup was allowed to

9 continue, resulting in SemGroup extending credit to

10 Westback that was not repaid.

11 So that might only be three steps. But to

12 really unpack that, we look to Paragraph 11 of

13 Carpenter's report, and there he explains what that

14 extending credit means. And he says SemGroup was

15 executing trades for Westback. And so when

16 Westback's trades lost money, these trades were on

17 SemGroup's book and that would increase SemGroup's

18 derivative liabilities and would -- and SemGroup

19 would record a receivable from Westback. And so it's

20 a loss of what -- a loss on Westback's trades that

21 lead to the growing receivable.

22 And so what we have now, with respect to

23 their Westback damage claim, is that as a result of

24 failures, alleged failures with respect to

25 Westback -- and they put a date they're measuring


25

1 this from, March of 2006 -- they say this improper

2 relationship would have -- was allowed to continue.

3 And then they say in their next step that there is

4 trading losses that happened -- Westback's trading

5 losses after March of 2006. So now you have a third

6 party's trading losses as the market goes to

7 unprecedented heights with great volatility, and that

8 that increases the receivable that SemGroup had from

9 Westback by 256 million.

10 And then the next step is Westback receivable

11 doesn't get repaid, and that's how they get to their

12 measure of damages.

13 Again, Judge, anything but direct. Again,

14 downstream losses with intervening events.

15 Now, the Plaintiff -- I'd like to respond to a couple

16 of arguments that the Plaintiff makes.

17 One, they suggest that the Court can't

18 determine this issue as a matter of law, and if we --

19 oh, there -- I'm sorry. That's the last billed,

20 which at the bottom adds, the SemGroup case and the

21 Plaintiff's theories here are trading and Westback,

22 their attenuated theories.

23 And the Plaintiff's argument is that this

24 issue can't be determined as a matter of law, and

25 they cite to some authorities from other


26

1 jurisdictions that say -- that suggest that in those

2 jurisdictions maybe the issue can go to a jury.

3 But that's not the approach that the Tenth

4 Circuit took. It's not the approach the Northern

5 District of Oklahoma took.

6 Candidly, the Combustion Systems case is one

7 where the Court said generally courts don't push this

8 to a jury, but then went on and said, but in

9 clear-cut cases, courts can decide the issue, and the

10 Court went ahead and did on summary judgment.

11 THE COURT: I'm going to stop and ask you --

12 MR. BALASSA: Yeah.

13 THE COURT: -- some questions. I hate to

14 interrupt. Your presentation is very nice.

15 I just have a couple -- since you're going in to now

16 arguing against what they have said, I can go ahead

17 and ask some of my questions, because it kind of fits

18 in that way, okay, if you don't mind.

19 MR. BALASSA: Of course.

20 THE COURT: Some of the cases that you cited

21 and, interestingly enough, you could always call

22 Mr. Wohlgemuth himself, he is here. He can probably

23 tell us all about the Aircraft Fueling System case,

24 since he was one of the lead attorneys on it. So

25 very interesting that you pointed that out.


27

1 But, for instance, Judge Frizzell points out

2 and you note that consequential damages in that case,

3 which, of course, is a breach of contract case again,

4 which I am going to talk with you about, is something

5 that's -- and I can't find where I read it now. It's

6 something about -- says it's unusual. There we go,

7 Page 4. It's under one of your highlighted

8 paragraphs, but it says: Consequential or special

9 damages are those unusual or indirect costs.

10 So if we just step back and think about it, some of

11 the cases that you cite in number one are breach of

12 contract cases, and I can understand --

13 You know how I am, I'm going to pontificate

14 for a minute and a question will come.

15 -- that a breach of contract case is

16 different than a negligence case, because contract

17 cases, I think legally a court can and a lot of times

18 can and will give summary judgment on contract terms

19 or issues, because if they are in the contract and

20 it's literally there and you're not using any parol

21 evidence, the Court can look at it and say factually

22 this is what it is, legally this is what it's going

23 to be, and there isn't any determination as to what

24 those are.

25 And I think in all of these cases as well,


28

1 none of them include the type of service -- it's

2 almost a product-type contract, or something that

3 they are providing, that if it fails or it goes away,

4 they do know what a direct damage is versus a

5 consequential damage.

6 In this case, where we have a negligence

7 claim, a professional negligence claim, it's almost

8 like looking to a med mal claim or some other kind of

9 professional negligence claim where the service

10 itself has a charge, but the reason for the service

11 can be more directed at what the damages can or

12 cannot be.

13 For instance, when I was thinking about you

14 all's arguments, literally, if you just get down to

15 the nuts and bolts of it: What does an auditor do

16 and what is an audit for?

17 Are you telling me that SemGroup paid --

18 let's just be silly and say a thousand dollars for

19 their -- for Pricewaterhouse to come in and do an

20 audit. And if the audit's crappy, then you just owe

21 them a thousand bucks, because you did your work;

22 that's the product; it's the direct damage; that's

23 what you actually had to pay to get the audit; and

24 even if it's not good enough, it doesn't matter,

25 because that's the product.


29

1 Or is it more of that it's not -- an audit is

2 for a company to have a professional, like

3 Pricewaterhouse, come in, look at what their books

4 are, and the product is the knowledge of the auditors

5 to give them advice about how the company is

6 financially doing. And if that is not correct or is

7 done negligently, then the usual -- not unusual --

8 the usual consequence could be that your company will

9 fail or things won't happen in accordance to what

10 could be because the professional that was supposed

11 to report it, that was hired to find anything, that's

12 the job, that is a direct or compensatory, which is

13 the other argument they have that you might be

14 getting to, because of the -- kind of a negligence

15 claim. It's not a -- it's a -- and they talk a

16 little bit in their argument about a compensatory

17 damage versus a consequential damage.

18 But if you can address that for me, because

19 that's what I am -- the nitty-gritty of all the other

20 cases that you're talking about, I do understand.

21 But we're not talking about an alarm system that was

22 put in a house or some kind of airplane product that

23 wasn't going to work or a combustion system issue

24 that doesn't work. We're talking about a

25 professional that's rendered some type of advice and


30

1 that's the product.

2 So what is the direct outcome of that versus

3 consequential? Can you explain why you think these

4 cases fit in with your argument when we're not even

5 in a breach-of-contract type of case?

6 MR. BALASSA: I think I can, Your Honor.

7 THE COURT: Okay.

8 MR. BALASSA: Let me start just by addressing

9 your question about what is an audit. An audit --

10 and what's the product of an audit. The product --

11 THE COURT: It can be different things. I

12 understand.

13 MR. BALASSA: But a financial statement

14 audit, the product is one page. It's a one-page

15 opinion that's opining on the reasonablenesses of the

16 financial statements that have been audited. It's an

17 opinion that the auditor is giving reasonable

18 assurance that the financial statements are not

19 materially misstated.

20 THE COURT: Right.

21 MR. BALASSA: It's not providing business

22 advice to the company. It's not even providing

23 advice on financial management at the company. It's

24 an opinion about the financial statements, the

25 balance sheet, the income statement, and statement of


31

1 cash flows that the company has prepared. Now --

2 THE COURT: But isn't the company betting?

3 Like, let's say that, just in contrast,

4 Pricewaterhouse actually said: SemGroup, you are a

5 financial disaster waiting to happen. Isn't that

6 what they are paying you for, to even tell them that?

7 And when you don't and they're saying that you

8 should, is it a direct or usual damage because you

9 failed to do that job and give that one letter --

10 one -- whatever is included in that letter. How is

11 it an unusual consequence that if you don't do that

12 the company could take different steps because they

13 don't understand their financials?

14 MR. BALASSA: Well, there is an infinitive

15 number of possibilities of what might happen with a

16 company. And the reason that auditors limit their

17 liability this way really is the same as the alarm

18 company. Now, the liability wouldn't be limited to

19 $50. If the auditor were paid two million dollars,

20 the client could recover the two million dollars.

21 But we're not talking about an alarm company where

22 the risk is the home; we're talking about an audit

23 firm that does audits for tens of thousands of

24 companies where the potential consequences could be

25 tens of millions, hundreds of millions or, in this


32

1 case, claiming over a billion dollars each, and so

2 the auditors couldn't do the work. It is analogous

3 in that respect to the alarm company situation where

4 the auditor is not going to take on the -- what Your

5 Honor said is all of the possibilities. Is it one

6 possibility that a company goes out of business? Is

7 it another possibility, I guess, that they might

8 engage in other speculative trading? All of those

9 are possibilities. And maybe those are recoverable

10 at law, as consequential damages. But that's why we

11 have a provision here. I don't want to suggest to

12 the Court that an audit client could never recover

13 against an auditor the kinds of damages that you're

14 hypothesizing. But --

15 THE COURT: Isn't that going to happen,

16 though, if you have that vague of a -- I mean, the

17 other issue that they say is that you aren't specific

18 in what kind of damages are listed in this contract,

19 and that's another issue. I mean, by you-all saying:

20 Every damage in the world doesn't count, except for

21 the fee that we paid you -- you paid us --

22 MR. BALASSA: The terms here, consequential

23 damages, they're not -- respectfully, they're not

24 ambiguous. They have a meaning under the law. And

25 the requirement that we look -- that the Court; not


33

1 the jury -- but the Court look to the profession I

2 think is instructive here, because the case law

3 explains what the terms mean. And the Plaintiff

4 hasn't presented any evidence, Your Honor, that the

5 parties here had some different expectation. They

6 don't have any witness testimony they cite -- to cite

7 where someone says: Well, I signed that contract,

8 but I meant something different; I meant to depart

9 from the normal meaning in the law. And to put the

10 issue to jurors where jurors would then -- to do this

11 appropriately you would have to understand what the

12 Tenth Circuit and the Northern District of Oklahoma

13 and other cases and the restatement of contracts that

14 we cite say: That's not the appropriate function for

15 the jury; that's the function for a court.

16 And, Judge, on this issue of these being

17 contract cases, I think it is important that this is

18 a contractual relationship. That's, of course, how

19 we have the provision.

20 THE COURT: Sure.

21 MR. BALASSA: PricewaterhouseCoopers is

22 performing the services that Plaintiff claims were

23 negligently provided under a contract. And the

24 Plaintiff could have sought in tort -- we call them

25 contract damages. But the way (inaudible) damages --


34

1 (Off the record.)

2 MR. BALASSA: We call them -- Your Honor has

3 referred to them as contract damages, but they --

4 they are damages that one can seek, and they're

5 normally sought in contract cases. But they could be

6 sought here. There is no question. In fact, audit

7 firms are often sued for, among other things, the

8 fees that they paid the audit client, and those are

9 the direct harm.

10 Plaintiff hasn't chosen to do that or has

11 chosen not to. They have chosen to do something

12 else, to send them downstream, or knock-on damages.

13 And if we look at the provision of the contract to

14 what these sophisticated parties agree to -- and

15 that's behind Tab 1 of the binder on Page 3 -- the

16 provision does speak to the parties' intent. And it

17 says that there won't be recovery for consequential,

18 indirect, lost profit or similar damages, not just in

19 contract cases, but the first type of case that's

20 identified as a claim in tort. The parties

21 understood that this provision would apply in a tort

22 case, not just to a breach of contract claim.

23 And the Fretwell case, in the Fretwell case,

24 which is in the binder I handed, Your Honor, the

25 Plaintiff argued that: Hey, this is a tort case;


35

1 this isn't a contract case.

2 Bear with me for a moment.

3 And the Court there rejected the argument.

4 The Court there said the tort -- and this is at

5 Paragraph 6 of this Oklahoma Supreme Court's

6 opinion: The tort alleged by the Plaintiffs in this

7 case, involved in this case, is one arising out of a

8 contractual relationship and, as such, bears a close

9 resemblance to an action for a pure breach of

10 contract. A tort arising out of a contractual

11 relationship exhibits characteristics of both tort

12 and contract actions. And then Paragraph 7: It

13 reasonably follows that since the contract

14 established the duty, any lawful limitations in the

15 contract may also limit the liability of the

16 tortfeasor.

17 And so these damage concepts, they apply both

18 in contract and in tort. And the reason that we

19 cited the cases that discuss the meaning of the term,

20 that those are contract cases, is simply that that's

21 the claim the Plaintiffs sought to bring them, but

22 these damages and the concept of causation is -- that

23 applies across types of cases as the consequential

24 damages provision provides.

25 And then Your Honor asked about whether the


36

1 provision is too vague or ambiguous, and I'd submit

2 that if we look back at the -- well, first of all,

3 there is an authority -- Oklahoma authority that the

4 Plaintiff cites for the proposition that using the

5 term "consequential damages" makes the term

6 unenforceable. To the contrary, the Penncro case,

7 the Aircraft Fueling Services case, and the

8 Combustion Systems cases are all cases where that

9 term is used. And in at least two of those three,

10 there is not more specificity provided.

11 So when there are sophisticated parties, as

12 there are here, as Your Honor pointed out, or as Your

13 Honor is aware, when there are capable lawyers on

14 both sides sign a contract, the parties understand

15 that they're going to be -- that the contract here,

16 the legal terms, are going to be interpreted

17 according to what lawyers understand the term to

18 mean, and that if we were to apply some other

19 definition or kick the issue to a jury so they can

20 decide, nonexperts in law, then we're departing from

21 what the parties understood and what the parties

22 intended.

23 THE COURT: And something else about that.

24 Now, I don't necessarily agree that I cannot decide

25 whether or not what that means legally and what


37

1 consequential damages means, if it's something that

2 can be given summary judgment in or not, but isn't

3 another part of your contractual statement with

4 them -- maybe I -- I wrote this down. I thought this

5 was part of the clause -- is unless

6 PricewaterhouseCoopers' actions were willful or

7 fraudulent. Isn't that also part of that clause --

8 the damage clause in the contract?

9 MR. BALASSA: It is, Judge.

10 THE COURT: So, in other words, legally, the

11 Judge could make a determination that you'd like me

12 to -- which is what they're asking for might be being

13 consequential and, therefore, if the jury doesn't

14 find -- which they are asking for punitive damages in

15 this case -- and the jury -- if I can word it an

16 assumption here -- would be able to consider whether

17 PricewaterhouseCoopers' actions were willful or

18 fraudulent, and if they make that determination, even

19 if I do determine or can determine that these are

20 consequential damages, it's still an issue for the

21 jury to then decide if you are willful and fraudulent

22 and you can be liable for those type of damages;

23 correct?

24 So it's kind of a split; the Judge can decide

25 a certain amount, and if it gets somewhere, the jury


38

1 has to make a determination if it's willful and

2 fraudulent. Correct?

3 MR. BALASSA: Yes, but.

4 THE COURT: Okay.

5 MR. BALASSA: And the "but," Your Honor, is

6 that the Plaintiff has made this argument -- and, in

7 fact, I'll go even a step further -- in Oklahoma the

8 provision's not enforceable with respect to findings

9 of gross negligence, and so we're talking about gross

10 negligence, fraud, or willful conduct, as what Your

11 Honor, I think, is referring to as a carve-out, an

12 issue, that the jury could -- an issue that could go

13 to the jury with respect to these damages.

14 But here is the issue, Your Honor: We're on

15 summary judgment and the Plaintiff hasn't made any

16 showing of gross negligence or of fraud. There is a

17 high burden for gross negligence under Oklahoma law.

18 As Your Honor knows, it requires intentional failure

19 to perform manifest duty and reckless disregard of

20 consequences or a callous indifference to life,

21 liberty, or property of another. And what the

22 Plaintiff does in their brief at Page 5, they cite to

23 the Petition. We're at summary judgment; you come

24 forward with your evidence or you're out.

25 And they also cite to their statement of


39

1 disputed material facts, and they cite to Sections 29

2 and 30 of their statement and material facts.

3 So this is the evidence they are coming forth with to

4 support the notion that there has been gross

5 negligence, according to their brief at Page 5.

6 And if Your Honor would turn to Tab 2 of the binder,

7 we have behind Tab 2 the Plaintiff's cover sheet,

8 their response brief, and then they have this

9 Appendix A.

10 THE COURT: Uh-huh.

11 MR. BALASSA: And we've excerpted the pages

12 or we included the pages, 27 through 29 of their

13 Appendix A, and that's because their Section 29 and

14 30 in the left-hand column -- which is what they cite

15 in their brief as evidence of gross negligence.

16 And the evidence they cite there is about

17 members of management looking to the auditors to do a

18 good job; to carry out their duties under the audit

19 standards; they took comfort from the fact PwC was a

20 competent firm; the bankers saying that they require

21 audits; that's all under 29.

22 In fact, 30 that they cite to is testimony

23 from company -- from the company CFO that SemGroup

24 hired PwC as its auditor because of PwC's expertise.

25 None of this has anything to do with wrongful conduct


40

1 by PwC, much less intentional, wrongful conduct. The

2 evidence that they have put forward doesn't satisfy

3 the requirements to even get to a jury on the issue

4 of gross negligence or fraud. It's just not there.

5 And so while Your Honor is correct that if Plaintiff

6 had come forward with evidence of gross negligence,

7 willful misconduct or fraud, then the jury could be

8 instructed that these damage claims are available

9 only if they make a finding of one of those three,

10 but otherwise, the damage claims are out.

11 But the Plaintiff hasn't done that; they

12 haven't come forward with that evidence on summary

13 judgment, so even that issue should not go to the

14 jury.

15 THE COURT: Okay. Thank you. I don't think

16 I have any other questions. I might after they get

17 up and talk to us. You know how that makes my brain

18 work and then I might have something for you, but

19 we'll see. I'm going to give them a chance to

20 respond.

21 MR. BALASSA: Thank you.

22 THE COURT: Mr. Keglovits, are you arguing?

23 MR. KEGLOVITS: Yes, ma'am.

24 THE COURT: Okay.

25 MR. KEGLOVITS: Your Honor, if I may, why


41

1 don't we start where we ended with Mr. Balassa --

2 THE COURT: That's fine.

3 MR. KEGLOVITS: -- on the question of

4 enforceability of this clause as it relates to both

5 the breach of fiduciary duty claim and the gross

6 negligence claims.

7 And Mr. Balassa stated the proposition that

8 we have not come forward with evidence to avoid a

9 summary judgment on gross negligence; therefore, that

10 claim is out.

11 No motion was made on the gross negligence

12 claim, no motion was made on the breach of fiduciary

13 duty claim, and as Your Honor is aware, under

14 Oklahoma law, the movant -- in this case, it would be

15 the Defendant -- would have the burden of making a

16 motion to say there is no evidence of gross

17 negligence and, therefore, that claim should be out.

18 There is no evidence of breach of fiduciary duty and,

19 therefore, that claim would be out. And the movant

20 would have the burden of showing you that there are

21 no facts or no inferences from the facts in the

22 record from which a reasonable jury could conclude

23 there was gross negligence for breach of fiduciary

24 duty.

25 None of that has happened. What they're


42

1 trying to do is somehow bootstrap the dismissal of

2 some of our claims by virtue of an argument over

3 whether damages are consequential or direct, and I

4 submit to you, that's improper.

5 And, frankly, as the Court knows -- you've

6 probably tried cases where there are allegations of

7 gross negligence, recklessness, intentional

8 conduct -- I have yet to be involved in one of those

9 cases where one of the defendants raises their hand

10 and says: You know what --

11 (Off the record.)

12 MR. KEGLOVITS: I have yet to be involved in

13 one of those cases where the Defendant raises his or

14 her hand and says: You know what, I did it

15 intentionally. You know what, I decided I was going

16 to be reckless.

17 These are inferences that the jury draws from

18 all of the evidence. We have experts in this case.

19 Each side is an expert who submitted a very long

20 expert report that details, in our view, the faults

21 of the work that Pricewaterhouse did. They've got

22 their own expert who comes in and tries to explain

23 those away. But the jury is going to have to infer

24 from the failure to do things that they knew they had

25 to do, from the failure to do things right that they


43

1 knew they had to do right; whether that was simple

2 negligence or whether there was something more to it.

3 So enough said about that. There was no motion made

4 on that and it's not fair to ask us to come forward

5 with all of our evidence on those claims.

6 All right. So let's go back to the

7 fundamental issue, which is the damages. And if we

8 could put up the engagement letter.

9 I think in the course of responding to your

10 question, Mr. Balassa may have oversimplified the

11 responsibilities of the auditors.

12 Well, that's not very good, is it?

13 THE COURT: Yeah, my glasses aren't helping

14 with that.

15 MR. KEGLOVITS: Can we get that to where you

16 can see it?

17 THE COURT: Are you going to, then, describe

18 for me what the audit entailed?

19 MR. KEGLOVITS: Yes.

20 THE COURT: Okay. Can I ask for the

21 definition of an audit?


23 THE COURT: Okay. If you just want to read

24 it, that's fine.

25 MR. KEGLOVITS: I will. Let me hand it up,


44

1 if you don't mind.

2 THE COURT: And make sure you don't read it

3 too quickly for Ms. Cavenah.

4 MR. KEGLOVITS: I'll try my best.

5 THE COURT: Thank you.

6 MR. KEGLOVITS: All right. What this is

7 supposed to say, for us all to see, has to do with

8 the two facets of an audit. And Mr. Balassa told you

9 about the first one, which is highlighted there:

10 Pricewaterhouse promised it would audit the

11 consolidated financial statements of the partnership

12 for the year ending 2007 and upon completion of the

13 audit would provide the partnership with an audit

14 report on the financial statements. And this same

15 language appears in every audit. And that's what

16 Mr. Balassa was talking with you about.

17 But Pricewaterhouse promises something else,

18 and if you go down to the paragraph that's

19 highlighted below under our responsibilities and

20 limitations right here, they talk about looking at

21 the internal controls of the company. These are the

22 protections -- the financial protections that the

23 company designs so that its assets don't walk out the

24 door. And what Pricewaterhouse promised to SemGroup

25 was it would consider the partnership's internal


45

1 control over financial reporting solely for the

2 purpose of determining the nature, timing, and extent

3 of auditing procedures necessary for expressing our

4 opinion on the financial statements, going back to

5 the first of the two obligations.

6 Now, they're very careful to say that: This

7 consideration will not be sufficient to enable us to

8 provide assurance on the effectiveness of internal

9 control over financial reporting; however -- and this

10 is the important part -- while they say: We're not

11 going to promise you we're going to find everything,

12 they say: However, any significant deficiencies and

13 material weaknesses and other deficiencies, i.e.,

14 those deficiencies in internal control over financial

15 reporting that are --


17 MR. KEGLOVITS: Sorry.

18 -- i.e., those deficiencies in internal

19 control over financial reporting that are of a lesser

20 magnitude relating to internal control over financial

21 reporting that we identified during our audit will be

22 communicated to the partnership. So we're going to

23 do an audit and we're going to give them the one-page

24 opinion that Mr. Balassa told you about.

25 The audit standards, though, require them


46

1 also, when they find a red flag, to communicate that

2 red flag to the client; in this case, the

3 partnership.

4 So whether we're talking about the

5 speculative nature of trading that violates the

6 company's risk management policy, whether we're

7 talking about the CEO draining hundreds of millions

8 of dollars out of the company that they knew every

9 fact about, those weaknesses they promised would be

10 communicated to the partnership.

11 And so with that, with the actual obligations

12 of Pricewaterhouse before you, then you ask the

13 question I think you were asking before: What are

14 the natural and foreseeable damages that flow from

15 the damage to do either of those? And I believe the

16 answer is the natural and foreseeable damage is that

17 a company would lose assets that it otherwise would

18 not lose if Pricewaterhouse had done its job; that it

19 said: You guys are a financial mess. You need to

20 stop what you're doing. That's called a

21 going-concern opinion. If it had said that -- this

22 thing they call the asset, where Mr. Kivisto was

23 taking hundreds of millions of dollars and hiding

24 them, not disclosing them as losses -- and we can get

25 to that in some of these other arguments -- if they


47

1 had told the partnership that was going on, we have

2 testimony in the record from the banks and from the

3 independent directors that they would have done

4 something.

5 But Pricewaterhouse didn't make that

6 communication. You know what it did? It decided to

7 report the Westback issue to a subordinate of

8 Mr. Kivisto: Just wanted you to know, your boss is

9 draining hundreds of millions of dollars out of the

10 company. We're going to check the box that we've

11 done our job. That's obviously my characterization.

12 I'm sure they've got a very different view of it.

13 But that's what happened.

14 What happens when you don't tell the people

15 who are responsible for managing Mr. Kivisto, the

16 entire board of managers? Usually it's the board of

17 directors, but here it's called the board of

18 managers. Well, it may happen again and again. It

19 may accelerate as he gets away with it.

20 And so what happened? Three hundred million dollars

21 left the company. That's a natural and foreseeable

22 damage from the fair duty to discharge your job.

23 So what did we ask for here? We've asked to recover

24 the assets, SemGroup's own assets that it lost, even

25 through this Kivisto/Westback arrangement, or through


48

1 the trading that happened when it didn't need to

2 happen.

3 And, you know, what's gone on here is

4 Pricewaterhouse has set up kind of the straw man that

5 said: The only value of our services is what you pay

6 us.

7 And I think Your Honor is dead right, that

8 that's wrong. There are multiple perspectives on

9 value. Pricewaterhouse may have garnered two million

10 dollars from the audit, it may have garnered more

11 dollars for the tax work, it may have garnered more

12 dollars for consulting work, but SemGroup had its own

13 perspective on the value of that contract, and there

14 is nothing in the law that says its perspective, its

15 valuation of that contract has to be the same.

16 And I tell you, when I go to the doctor, when

17 I go to the dermatologist and I pay him $20 to check

18 me for moles, that's probably worth 20 bucks to him,

19 but it's worth a heck of a lot more to me when I

20 leave there, after he tells me, You've got no moles.

21 And if there was a mole that turned out to be

22 cancerous that he didn't tell me about, my damages

23 are a lot greater than 20 bucks.

24 So it's wrong. It's a straw-man argument to

25 tell you that the only actual damages that can flow


49

1 from this contract are what Pricewaterhouse charged,

2 and there is no authority to that effect that you've

3 been provided and there is no testimony to that

4 effect.

5 Now, SemGroup could have come in and said:

6 You know, because 300 million dollars was drained out

7 through Mr. Kivisto's trading, we lost out on

8 opportunities to do other deals; we had to borrow

9 money at a higher rate; we could have got more

10 investors. But we're not asking for those kinds of

11 damages. Those are consequential damages. We're

12 asking to get our assets back. Those are the direct

13 damages.

14 Mr. Balassa talked with you about the Penncro

15 case and, you know, that's really a fascinating case

16 in many ways. It's Kansas law, obviously; we didn't

17 really have an Oklahoma law case up there on the

18 screen for you to look at. And I think it

19 illustrates the danger of the oversimplification that

20 Mr. Balassa was submitting to you, because in

21 Penncro, despite a consequential damage limitation,

22 guess what was recoverable? Lost profits.

23 And so I don't think anyone can say that

24 these terms have a specific defined meaning in all

25 context. I think you've got to go back to the


50

1 fundamental questions of what did SemGroup expect it

2 was going to get, and when it didn't get it, what

3 assets did it lose; not what other opportunities, not

4 what other profits it might have earned if it had

5 those opportunities, but what assets did it lose.

6 And, you know, we see this dichotomy appearing

7 between the foreseeable and the unforeseeable, the

8 usual or the unusual, in a lot of places.

9 If you put up Title 23. Can you do the next one?

10 This is the measure of damage in tort, which is what

11 these case -- all the claims are in this case. And,

12 obviously: For a breach of an obligation not arising

13 from contract; the measure of damage, except where it

14 expressly or otherwise provided --


16 MR. KEGLOVITS: -- in this chapter. Sorry.

17 -- is the amount which will compensate for

18 all detriment proximately caused thereby, whether it

19 could have been anticipated or not. There is that

20 dichotomy, anticipated or not. Actual,

21 consequential, I assume.

22 If you look at Judge Frizzell's decision in

23 the Aircraft Fueling Systems case -- go to the next

24 line -- same thing, at star 4 there, Judge Frizzell.

25 I believe this was under Texas law. I couldn't


51

1 really tell from reading the case, but he's citing

2 some Fifth Circuit opinions, so maybe it was Texas

3 law.

4 But in any event, he says -- it starts by

5 saying: The Tenth Circuit has explained special

6 damages depend on particular circumstances. General

7 damages of an ordinary result to the conduct

8 alleged --

9 (Off the record.)

10 THE COURT: Where are you on there? Under

11 Star 4?


13 THE COURT: I am trying to find you as well.

14 Okay. And where are we reading from under there?

15 MR. KEGLOVITS: I'm starting by reading where

16 he explains what the Tenth Circuit has said about the

17 difference between special damages and general

18 damages. Again, we've got this dichotomy getting set

19 up.

20 And Judge Frizzell, citing to a case out of

21 the Fifth Circuit, equates consequential and special.

22 And there he says that --

23 THE COURT: Oh, that's the part I was talking

24 to him about, actually.

25 MR. KEGLOVITS: Right.


52

1 THE COURT: Okay.

2 MR. KEGLOVITS: Consequential or special or

3 unusual or indirect. They're beyond what one would

4 reasonably expect to be the ordinary consequences of

5 the breach.

6 And so, again, I think we're back to a couple

7 of pretty general principles: Number one,

8 consequential damages can have a whole lot of meaning

9 in a whole lot of cases. And I think even in this

10 Penncro case --

11 Was it Gorsuch that was our judge who wrote

12 it? Yeah.

13 -- he said in these contracts, parties can

14 call an apple an orange, if they want to do it that

15 way. There is no uniform definition for these

16 things.

17 So, in that case, he was following the

18 particular contractual language there to determine

19 what consequential meant, and he said direct included

20 lost profits.

21 So kind of jumbled up, but all to say that

22 there is not a general rule in the law that you can

23 follow about what the meaning of these phrases are,

24 other than these dichotomies that you're seeing:

25 General, special; actual, consequential; foreseeable,


53

1 not foreseeable; usual, unusual. And I think it's

2 going to be incumbent on the Court to determine

3 whether the kinds of damages that we're asking for

4 here are usual, foreseeable, actual assets of ours

5 that we lost, but whether it's somehow completely

6 unforeseeable that the failure to advise of the CEO's

7 draining funds would cause him to continue to drain

8 funds. Those are the questions that the Court is

9 going to have to struggle with.

10 Last, if I can, I would like to talk about

11 the Fretwell decision just for a minute, because

12 Mr. Balassa raised it, if you remember.

13 THE COURT: Which one?

14 MR. KEGLOVITS: The Fretwell.

15 THE COURT: Okay. Yes.

16 MR. KEGLOVITS: And if you can put up that

17 slide, please, Janet.

18 Now, remember, to set this up, this was a

19 case where the owner of the home was burglarized,

20 lost I think they said in the case approximately

21 $90,000.

22 THE COURT: I think -- is this the one where

23 the police were there and then they left and then the

24 robbers came back?

25 MR. KEGLOVITS: Right.


54

1 THE COURT: Yeah.

2 MR. KEGLOVITS: Pretty slick robbers.

3 THE COURT: Yeah. While they stood out and

4 watched them and they went back in. People got 50

5 bucks.

6 MR. KEGLOVITS: Yeah.

7 THE COURT: Yeah.

8 MR. KEGLOVITS: Almost a scripture for how to

9 do it.

10 But in any event, the homeowners sued for 90

11 grand and the alarm company came in and defended,

12 based on this -- the contract provision here, which,

13 first of all, is very different from ours. But what

14 was the 90 grand? It was the actual damages. This

15 is not a consequential damage limitation. There the

16 Court was talking about the losses from the failure

17 to do your job, from the failure to report someone

18 cutting your telephone line, as an actual damage.

19 There was no discussion of foreseeable or

20 unforeseeable. What the Court was saying is that

21 this provision is very clear; they have created a

22 liquidated damages provision.

23 So it doesn't really inform us all that much

24 about what is consequential, what is foreseeable,

25 other than as you point out, I think, and we point


55

1 out in the brief, PwC surely could have written a

2 clause like this, if it wanted to. It could have

3 said: Your damages are limited to X.

4 I suspect the reason they don't do that, or

5 at least didn't at the time, was there are

6 competitive pressures for their services and they

7 know people won't sign up for them if they're going

8 to limit their damages to $50 or two million dollars

9 and their competitors won't. That's speculation. We

10 don't know that in the record. There is nothing in

11 the record about that.

12 So I am just telling you from an argument

13 basis, I don't think that this case can tell us much

14 about consequential versus direct, other than we know

15 that the Court will enforce specific provisions like

16 this and courts have a difficult time enforcing

17 against the Plaintiff a more general and vague

18 provision, like we got in this case.

19 So, fundamentally, these damages are our

20 assets that we lost and it's foreseeable that they

21 would be lost if Pricewaterhouse did an audit and

22 didn't report and, therefore, our recovery.

23 THE COURT: All right. Thank you very much.

24 All right. Do you have a short and quick

25 rebuttal? Promise?


56

1 MR. BALASSA: Very short, Your Honor.

2 THE COURT: Okay. Go ahead.

3 MR. BALASSA: Mr. Keglovits has put out some

4 concepts to the Court.

5 THE COURT: Oh, I'm sorry. Can I interrupt

6 just a second? I forgot to ask him one question. If

7 you can just -- No. Just stand there and I need to

8 ask a question. He made an argument earlier --

9 Sorry, I didn't want to interrupt you and I kept

10 thinking about something else that he brought up.

11 I believe one of the arguments was as well that you

12 all are saying that I, as the Judge, cannot and

13 should not determine -- or this whole thing -- this

14 whole issue should go to a jury. I didn't see that

15 argument. I thought you were just arguing -- I

16 didn't believe that you were arguing that. Were you

17 making that argument?

18 I mean, I understand under the willful,

19 fraudulent, that type of thing, that would be up to a

20 jury and I understood your argument for that. But is

21 the Plaintiff taking the stance at this point that

22 you don't think it's a legal determination on whether

23 or not the damages you are seeking are actually

24 consequential and if they are within this clause in

25 the contract or not; yes or no?


57

1 MR. KEGLOVITS: We did not move for summary

2 judgment on this issue.

3 THE COURT: Right. But your argument, when

4 you responded, wasn't: You can't grant summary

5 judgment because it's not your prerogative? It's not

6 a legal question; it's a question for the jury?

7 MR. KEGLOVITS: No. I think what we said in

8 the brief is where you get down to a question of

9 whether it was foreseeable, perhaps that's a jury

10 question. And what the Court could do, I suppose, in

11 that circumstance, is to instruct the jury that

12 direct damages are...give the definition;

13 consequential damages are...give your definition; and

14 tell the jurors in their verdict on negligence, they

15 cannot include consequential damages, but their

16 verdict on gross negligence or breach of fiduciary

17 duty could include any damages that they believe are

18 consequential.

19 THE COURT: Okay. Thank you. Sorry. I

20 forgot to ask that question.

21 Okay. Go ahead.

22 MR. BALASSA: Very briefly, Your Honor.

23 Mr. Keglovits stood up here and he referred to some

24 general standards amorphous principles, which as we

25 all know aren't especially useful in deciding cases.


58

1 That's why courts look to facts and that's why we put

2 up -- we went through and put up cases, Your Honor,

3 that addressed the meaning of consequential damages,

4 either with hypothetical or with the actual facts in

5 the cases. And so we're not left with the kind of

6 amorphous terms that candidly, for the most part,

7 aren't terms that are used in the contract here,

8 terms like direct -- excuse me -- terms like general

9 versus special. We looked for cases that address the

10 term that appears in this contract and that's what

11 defines what lawyers, the relevant profession, would

12 look to and understand in the term.

13 Second, Your Honor, Mr. Keglovits made a

14 point that: We're just trying to get our assets

15 back. And the assertion they that they're just

16 trying to get their assets back doesn't make this any

17 less convoluted. There were many steps involving

18 many third parties, intervening events, changes in

19 the price of oil affecting the derivatives, positions

20 that either Westback or SemGroup had put on, that all

21 happened after. And that, Your Honor, is downstream.

22 That, Your Honor, is not an effect. And that, Your

23 Honor, candidly, under any reasonable definition of

24 consequential, especially the one that courts had

25 actually applied to cases with these provisions, is


59

1 consequential.

2 Last, Your Honor. I'd like to reiterate that

3 the auditor is not a general insurer of its client.

4 If there is a problem with the financial statements,

5 even if the auditor misses it, that doesn't make the

6 auditor the insurer, and that's especially true where

7 there's a provision that prohibits consequential

8 damages, the provision that, under Mr. Keglovits's

9 logic, would effectively be read out of the contract.

10 THE COURT: Okay. Thank you very much.

11 Mr. Keglovits, anything in response that?

12 MR. KEGLOVITS: Nothing, Your Honor.

13 THE COURT: Okay. Then, at this point, I

14 think we're going to -- we've been going for a little

15 over an hour, so we're going to take about a

16 five-minute break, just so everyone can stand and

17 stretch, so we'll be back at 11:25.

18 The Court will be in recess. Thank you very

19 much.

20 (Recess taken.)

21 THE COURT: Thank you. Be seated.

22 All right. Okay. Just like in the other

23 hearing, if I need time to think about it and take

24 more arguments in, I'll wait to make a decision. If

25 not, I'm not going to burden everybody with delay and


60

1 eating the frosting off the donut first, which is

2 what we said last time.

3 I have considered all of the arguments in

4 regards to the consequential damage claim and I am

5 going to overrule the request at this point in time

6 to grant summary judgment in that area for the reason

7 that I believe -- and I have looked through, I think

8 it's interesting that Mr. Keglovits brought up when

9 and how we can instruct the jury. And then you get

10 into thinking: Well, do you need an actual jury

11 instruction when -- like the arguments we're going to

12 make pretty soon? Are you really talking about

13 damages? Are we talking about the foreseeability of

14 the cause and the cause is then a result of the

15 damage? And if the jury actually finds that the

16 audit was the direct cause of the injury, then

17 whether or not the damages would flow directly from

18 that or not I think would be something that the

19 jurors would have already considered when they're

20 considering that other argument.

21 I'm going to leave my decision at that and

22 note the Defendant's exception to my ruling in

23 regards to that first question we had in summary

24 judgment. And I, again, appreciate everyone's

25 preparation and argument. You guys did a great job.


61

1 I want to move on to -- I think the statute

2 of limitations argument was next.

3 In this summary judgment issue number two:

4 Plaintiff's claims regarding PricewaterhouseCoopers'

5 2005 audit are barred by the statute of limitations.

6 Yes, sir? Are you going to argue those for the

7 Defendant?

8 MR. RABINOVITZ: If that's okay with you,

9 Judge.

10 THE COURT: Of course.

11 Who's going to argue for the Plaintiff?

12 Mr. Keglovits again?

13 MR. KEGLOVITS: I will, Your Honor.

14 THE COURT: Okay. Thanks.

15 All right. You can begin whenever you are

16 ready.

17 MR. RABINOVITZ: Your Honor, may I hand up

18 quickly just --

19 THE COURT: Oh, sure.

20 MR. RABINOVITZ: -- a few key documents?

21 THE COURT: Okay. Thank you.

22 MR. RABINOVITZ: Thank you.

23 MR. KEGLOVITS: Your Honor, before we begin,

24 so I don't interrupt Mr. Rabinovitz, we have behind

25 Tab 1 of these documents an affidavit that was


62

1 prepared pursuant to Title 12, Section 19 --

2 THE COURT: Okay.

3 MR. KEGLOVITS: -- which is, as you recall,

4 was the affidavit that was required in professional

5 negligence matters before you could file the suit.

6 There has been quite a bit of discussion about

7 whether that's constitutional.

8 THE COURT: Oh, yes. I know. Actually, the

9 Marouk case is mine.

10 MR. KEGLOVITS: But I'll just point out to

11 the Court that Section 19.1, I believe, of Title 12

12 says this affidavit may not be used and it's not

13 admissible evidence. And so we're going to make a

14 motion to strike now so we don't spend any time

15 talking about something that we shouldn't be talking

16 about.

17 THE COURT: Okay.

18 MR. RABINOVITZ: A couple of responses, if I

19 may, Your Honor.

20 THE COURT: Of course.

21 MR. RABINOVITZ: One, this was not raised in

22 the brief, so it's been waived; two, not moving it

23 into evidence; and actually, three, it can by statute

24 be used to strike claims that were not properly

25 under -- supported by an expert witness.


63

1 And so to the extent that the Plaintiff is now making

2 a claim for which they did not have an expert report

3 at the time, the claim would be stricken by law

4 anyway.

5 So it is capable to be used under statute for

6 that purpose --

7 THE COURT: Are you --

8 MR. RABINOVITZ: -- and that's the only

9 purpose we would be using it for here.

10 THE COURT: All right.

11 MR. RABINOVITZ: And I'll get there, Your

12 Honor. I'll get there.

13 THE COURT: Okay. But before we get there,

14 because if we're not going to go there, if you're

15 raising a Section 19 argument that either their

16 affidavit wasn't appropriate enough or it wasn't

17 filed in a timely manner or it didn't pass the

18 statutory muster to even file the claim in the first

19 place?

20 MR. RABINOVITZ: Well, Your Honor, if they're

21 now moving to strike, that would be part of our

22 response. But, no, we're using the expert report to

23 show Your Honor what they intended to file in their

24 Petition. And so if I can get to that, I think

25 you'll see where I'm going, if that's okay.


64

1 THE COURT: Okay. I'm going to hold your

2 objection in abeyance until he tries to admit it for

3 whatever purpose, and before he admits it, I'll take

4 argument if I need to, and I'll either allow it or

5 not for a limited purpose.

6 Okay. Go ahead.

7 MR. RABINOVITZ: So, as the Court knows, Your

8 Honor, the Plaintiff is intending to present at trial

9 claims for damages from three different audits done

10 by PwC --

11 THE COURT: Correct.

12 MR. RABINOVITZ: -- of SemGroup's financial

13 statements. That's 2005, 2006 and 2007. And

14 Plaintiff presents those claims under two legal

15 theories, both professional negligence and breach of

16 fiduciary duty. Both of those claims are subject to

17 a two-year statute of limitations.

18 But Plaintiff did not assert its claims

19 regarding PwC's audit of SemGroup's 2005 financial

20 statements within that two-year period. And as a

21 result, PwC is entitled to summary judgment on the

22 2005 audit claim.

23 Now, PwC contends that the statute of

24 limitations begins to run on the 2005 claim from

25 March 2006, so it expired in March of 2008, and the


65

1 Plaintiff contends that the limitations period for

2 the claim began to run in July of 2008 and so it

3 expired in July of 2010.

4 But that's not a question, Your Honor, that

5 the Court needs to resolve today, because the

6 Plaintiff -- well, because the Plaintiff concedes

7 that even under its formulation of the statute of

8 limitations, they had to assert the claim by July of

9 2010, and they didn't, Your Honor. They didn't

10 assert the claim until they served their expert

11 report in April 2013. This was years too late.

12 Now, in its brief, the Plaintiff argues in a

13 footnote that it did assert a claim regarding the

14 2005 audit, and it asserted it in its June 2010

15 Petition.

16 That's not true. And how do I know that?

17 How do we know what the Plaintiff asserted? Well,

18 there is two key documents. The first is the expert

19 report that we've already discussed, and the second

20 is the Petition, and I'd like to talk about both of

21 those.

22 As the Court knows, under 12 O.S. Section 19,

23 the Plaintiff was required to obtain before filing

24 this suit --

25 MR. KEGLOVITS: Your Honor, I don't know if


66

1 you want me to object now.

2 THE COURT: I'm just going to show your

3 running objection. I'm going to see why he wants to

4 admit it and then I'll make a ruling. Is that all

5 right?

6 MR. KEGLOVITS: That's fine.

7 THE COURT: A running objection?

8 Okay. Go ahead.

9 MR. RABINOVITZ: Under that statute, Your

10 Honor, the Plaintiff was required to obtain, before

11 filing its Petition, quote, a written opinion from a

12 qualified expert that concludes, quote again, based

13 on a review of available material, that a reasonable

14 interpretation of the facts supports a finding of

15 professional negligence, and the Plaintiff did obtain

16 such a report. And, Your Honor, this is behind Tab 1

17 of the binder I just handed up. And if we look at

18 Paragraph 8 of the report --

19 THE COURT: But before we even consider the

20 report that was attached, number one, I don't

21 remember you all raising this issue in your response.

22 Did you and where was it?

23 And, number two -- and I'm sorry if I missed

24 it.

25 And, number two, are you trying to tell me


67

1 that -- I'm not understanding how this is fitting in

2 to your statute of limitations argument.

3 Are you going to try to tell me what they --

4 the date of actual occurrence or when they should

5 have known based on what their expert said --

6 MR. RABINOVITZ: No, Your Honor.

7 THE COURT: -- to the law?

8 MR. RABINOVITZ: Let me answer both of those

9 questions --

10 THE COURT: Okay.

11 MR. RABINOVITZ: -- in the order you asked

12 them.


14 MR. RABINOVITZ: First, it was addressed in

15 our brief and I will find the cite for you.

16 THE COURT: Man, I read it ten times. I

17 couldn't believe I don't remember.

18 MR. RABINOVITZ: Apparently I didn't make it

19 stand out enough.

20 THE COURT: Sorry.

21 MR. RABINOVITZ: Page 6 of our brief, Your

22 Honor.

23 THE COURT: Okay.

24 MR. RABINOVITZ: So right under the heading,

25 number one, that is our -- our relief paragraph under


68

1 the heading number one.

2 THE COURT: Okay. Go ahead.

3 MR. RABINOVITZ: Okay. So what does the

4 report mean? To what are we using it for?

5 THE COURT: Right. Tell me that, then I'll

6 let you know if we're going to use it.

7 MR. RABINOVITZ: Yeah. Sounds fair.

8 THE COURT: Okay.

9 MR. RABINOVITZ: So Mr. Epstein tells us,

10 what did he rely on? What did he look at before he

11 issued his report that the Plaintiff had to get

12 before they filed this suit? Only the 2006 and 2007

13 financial statements. He did not even look at

14 SemGroup's 2005 financial statements. So the

15 Plaintiff could not have asserted a claim for the

16 2005 financial statements because they didn't have an

17 expert report underlying that claim.

18 So it's simply not possible that they

19 asserted a claim in their Petition for the 2005 audit

20 of SemGroup's financial statements, because their

21 expert didn't look at those financial statements.

22 THE COURT: And, honestly, I haven't -- I

23 have looked at it again and I wasn't kidding about

24 the fact that it was my decision in the Marouk case

25 that was held --


69

1 MR. RABINOVITZ: Right, Your Honor.

2 THE COURT: -- where the Supreme Court held

3 the cause unconstitutional after I said it was.

4 Are you insinuating in some way, number one,

5 that now that it's been declared unconstitutional,

6 that I should uphold that they are required to have

7 had that prior to making any other claims?

8 And, number two, I can't remember in the

9 opinion -- honestly, I've had this come up since then

10 and, honestly -- I just wasn't prepared for this

11 argument whether or not the Supreme Court made it

12 retroactive or not, and I -- or whether they are

13 determining whether it was substantive or procedural.

14 All of those questions are going to come into play.

15 MR. RABINOVITZ: I think you are using it for

16 a different purpose, so it makes it a little easier

17 probably.

18 THE COURT: Okay.

19 MR. RABINOVITZ: All this is is an indication

20 that they could not have intended to assert a claim

21 based on the 2005 audit.

22 THE COURT: Because they didn't put it in

23 there?

24 MR. RABINOVITZ: Exactly.

25 THE COURT: Are you saying somebody can't,


70

1 then, during discovery or other types of issues amend

2 their claims or their damages?

3 MR. RABINOVITZ: It's actually if they amend

4 their Petition, Your Honor, but there's never been an

5 Amended Petition filed in this case.

6 THE COURT: But this is -- okay. And then

7 this actual affidavit that their expert just used to

8 give a general opinion to the Court that they believe

9 they had enough to file it, they would have had to

10 get another affidavit to support a 2005 audit. Is

11 that what you're saying?

12 MR. RABINOVITZ: Well --

13 THE COURT: I'm not understanding how this is

14 limiting their claim.

15 MR. RABINOVITZ: Probably, Your Honor.

16 Probably they would have to go get another one,

17 provided that the statute was in effect at the time.

18 But my point is slightly different. My point is this

19 is an indication, because this is what they got

20 directly before they filed the 2010 Petition, which

21 is the only Petition in this case.

22 THE COURT: Okay.

23 MR. RABINOVITZ: It's an indication that they

24 did not intend to assert a claim for 2005. They

25 didn't even give the 2005 financial statements to


71

1 their expert. But, Your Honor, I don't want to get

2 bogged down on this. So if it makes sense, we can

3 turn to the Petition itself, which also makes --

4 (Off the record.)

5 THE COURT: Yeah, I'm going to sustain the

6 objection. I don't even want to get into that

7 affidavit. I don't agree with your argument. I

8 understand what you're saying, but I'm not going to

9 consider it. So, yeah, let's move on.

10 MR. RABINOVITZ: If we look, then, to the

11 Petition, Your Honor, the 2005 financial statements

12 are not mentioned a single time in the Petition, not

13 once; rather, every time the Petition says what

14 financial statements the Plaintiff is asserting were

15 misstated, it says the 2006 and the 2007 financial

16 statements.

17 And so let's take a look. If we turn to --

18 it's Tab 2 in your binder, Your Honor, and I've also

19 put it up on the screen.

20 If we look at Paragraphs 50 and 51 of the

21 Petition, and if you turn -- well, actually, so where

22 this is in the Petition, this is about three

23 paragraphs into the section of the Petition where the

24 Plaintiff starts to talk about PwC. Before that,

25 they're talking about Mr. Kivisto, and around


72

1 Paragraph 47 or 48, they turn to start to talk about


3 And here is what they say: PwC stated that

4 in its opinion, the SemGroup consolidated financial

5 statements complied with GAAP and were fairly

6 presented. PwC rendered this opinion with respect to

7 the 2006 financial statements and then, again, for

8 the 2007 financial statements.

9 PwC further represented that this opinion,

10 based on the audits PwC had conducted in accordance

11 with GAAS -- in other words, PwC issued unqualified

12 opinions for both years; two, both years. And

13 Paragraph 51, which is the second paragraph here says

14 the same thing. Again, each of these opinions and

15 representations were materially inaccurate. And when

16 they say which representations and opinions, they're

17 talking about at the bottom of the sentence '06, '07.

18 So this is Plaintiff's general explanation to

19 the Court and to PwC about what claims they are

20 pursuing.

21 Let's take a look next -- and this is Tab 3

22 of your binder, Your Honor -- at what they say

23 specifically about Westback.

24 So, first, we look at Paragraph 53 of the

25 Petition, same thing, now specifically about


73

1 Westback, though. The disclosures in SemGroup's

2 consolidated financial statements relating to

3 SemGroup's relationship with Westback and the status

4 of the Westback receivable not fairly presented for

5 both years. And what years are we talking about? As

6 of December 31, 2006 and as of December 31, 2007.

7 Paragraph 69 of the Petition, same thing. PwC's

8 audits of SemGroup for fiscal years ended 12/31/06,

9 12/31/07.

10 Same thing in Petition 71. Now, we're

11 talking specifically about audit procedures; its

12 audit procedures for 2006 and 2007.

13 On the next page, behind your Tab 3, Your

14 Honor, even more, and I won't take the time to go

15 through all of them, but they all say the same thing.

16 Each time the Petition lays out what financial

17 statements and what audits the Plaintiff intends to

18 challenge here, they make quite clear that it is the

19 2006 and it's the 2007 financial statements.

20 As a result, Judge, there is no way to

21 interpret the Plaintiff's Petition as doing anything

22 other than asserting a claim for '06 and '07 and not

23 putting PwC on notice of any claim regarding 2005.

24 In our brief, also on page 6, we cite 38 paragraphs,

25 and we're not leaving any out. These are the 38


74

1 paragraphs where they talk about what year's

2 financial statements they're asserting claims for.

3 And in each and every case, it says 2006, 2007.

4 Behind Tab 4 of your binder, Your Honor, is a

5 highlighted copy of the Petition, which highlights

6 each and every one of those 38 paragraphs.

7 And, thus, the Plaintiff's allegations are clear.

8 They pled a claim regarding '06 and '07 financial

9 statements and audits and they did not plead a claim

10 regarding the 2005 audit.

11 Oklahoma requires, as the Court knows, I am

12 sure, that a Plaintiff's Petition, quote, give fair

13 notice of the Plaintiff's claim and the grounds upon

14 which it rests. That's the Oklahoma Supreme Court's

15 decision in Powers vs. District Court of Tulsa.

16 In June 2010, Plaintiff's Petition told PwC that only

17 its 2006 and 2007 audits were at stake in this issue.

18 In April 2013, years later, after fact

19 discovery was almost fully complete, Plaintiff

20 asserted a new claim and they did it through their

21 expert report, not even through an Amended Petition,

22 Your Honor. That's too late. That's too late to

23 assert a claim based on the 2005 audit. It's outside

24 the statute of limitations. As a result,

25 PricewaterhouseCoopers is entitled to summary


75

1 judgment on the 2005 audit claim.

2 Now, to the extent, Judge, that the Court

3 does not rule for PwC on this argument, it would then

4 have to resolve the issue of when the statute of

5 limitations started to run. If you have questions

6 about that, I am happy to answer them, but otherwise

7 I was not planning to present on that orally. We'd

8 rest on our briefs.

9 THE COURT: Oh, okay, because I had questions

10 about that section.

11 MR. RABINOVITZ: Well, I'm happy to answer

12 them.

13 THE COURT: Let's do this. I'm going to let

14 them respond and then, depending on what I think,

15 even though you're going to rest on your briefs, if I

16 have some specific questions and we get to that

17 place, I'll let you -- I'm going to ask them, because

18 I want to.

19 MR. RABINOVITZ: Yes.

20 THE COURT: Because I have questions.

21 MR. RABINOVITZ: Absolutely, Your Honor.

22 THE COURT: Okay.

23 MR. RABINOVITZ: You know what, I just

24 realized, when I was pointing you to the page in our

25 briefs, I was talking about our reply brief. I just


76

1 want to make that clear.

2 THE COURT: Okay. Got it. And, actually, I

3 knew that and that's what I have.

4 MR. RABINOVITZ: Good. Thank you.

5 THE COURT: All right. Thank you very much.

6 Okay. Yes, sir, Mr. Keglovits.

7 MR. KEGLOVITS: So as I understand it, PwC is

8 down to arguing that, because our Petition didn't

9 sufficiently identify for them 2005 being at issue,

10 the claim should be thrown out. So --

11 THE COURT: Correct. Notice.

12 MR. KEGLOVITS: -- I want to point you to

13 some parts of the Petition that I don't believe were

14 highlighted in what you were shown. We can take a

15 look at them.

16 So let's put up the Petition.

17 Let's go to the very first paragraph of the

18 Petition. Blow it up.

19 Let's go to down where it's highlighted.

20 All right. So what do we say in the very

21 first sentence of the Petition: We inform the

22 Defendant that this action arises from one of the

23 most egregious instances of auditor malpractice in

24 Oklahoma history -- an understatement for sure --

25 and then Pricewaterhouse was the outside auditor for


77

1 those egregious instances for SemGroup from 2004 to

2 2008.

3 Okay. Let's go to Paragraph 66 of the

4 Petition.

5 THE COURT: Yes, for the law students in the

6 room, there are more than 66 paragraphs in this

7 Petition.

8 MR. KEGLOVITS: Let's blow that up.

9 All right. So Paragraph 66 is talking about,

10 in particular, the Westback arrangement and it says:

11 PwC was aware of the Westback arrangement Kivisto had

12 devised with SemGroup. PwC received a copy of an

13 agreement dated March the 20th, 2006, signed by

14 Kivisto, Westback and Eaglwing, confirming their

15 understanding that EaglWing was entering into trading

16 contracts as, quote, Westback's authorized agent and

17 representative and all obligations and benefits

18 under, bracket, such, closed bracket, contracts shall

19 be for the sole account of Westback, closed quote.

20 PwC knew or should have known that the details of

21 this arrangement, including that was the equivalent

22 of an interest free, no fee, unsecured, unlimited

23 line of credit for the CEO, would be material to the

24 independent managers and other users of the SemGroup

25 consolidated financial statements.


78

1 Now, it's important, Your Honor, here to stop

2 and remember that there is a difference between audit

3 years and calendar years, because at the conclusion

4 of 2005 the audit work begins.

5 So this audit work we're talking about here,

6 in March of 2006, is part of the 2005 audit. In

7 fact, PwC would not issue its opinion for the 2005

8 audit until it got this arrangement confirmed on

9 March the 20th of 2006.

10 So we specifically put PwC on notice that we

11 were criticizing an aspect of the 2005 audit in the

12 Petition.

13 Let's go to Paragraph 169, a hundred more

14 paragraphs down. Let's blow that up.

15 Remember, we earlier had defined the audits as 2004

16 to 2008? In performing the audits, not limited by

17 any year, of SemGroup, PwC failed to perform its

18 services according to the standards of its

19 profession, resulting in harm to SemGroup.

20 So you put them on notice that 2004 and 2008

21 are of interest to us, you tell them specifically

22 about a criticism we have about the 2005 audit, and

23 you seek recovery for the failure to perform its

24 services according to all of those audits -- for all

25 of those audits. Your Honor, I submit to you that


79

1 that is enough under the very liberal notice pleading

2 standard in Oklahoma for the Defendant to be on

3 notice that its 2005 conduct is at issue.

4 But there's more. Let's look at the first

5 discovery request.

6 THE COURT: I thought you were going to get

7 some Ginsu knives out.

8 MR. KEGLOVITS: But you got to pay shipping.

9 THE COURT: Yeah, there you go.

10 All right. Go ahead. Sorry to interrupt. I

11 couldn't help myself.

12 MR. KEGLOVITS: Let's go to the first

13 discovery request.

14 All right. We initiate document discovery in

15 the case; all right? The first time, we send them a

16 request for documents. And let's look at how we

17 define the relevant time period for Pricewaterhouse.

18 I think it's Paragraph S under the definitions or

19 instructions. Let's blow that up.

20 Unless otherwise specified, the relevant time

21 period for these requests is from January the 1st,

22 2004 to July the 22nd of 2008.

23 And guess what, Pricewaterhouse produced all

24 of its 2005 work papers to us without an objection.

25 They objected to the 2004 work papers and we had to


80

1 have a little bit of a resolution from Judge Cantrell

2 on that. But, again, Pricewaterhouse, on notice

3 through the Petition and now the discovery that 2005

4 is the relevant time period.

5 And then, of course, we go through discovery,

6 and I won't -- we haven't tried to and I won't try to

7 belabor you with all of the questions that were

8 asked, but I don't think anybody really is going to

9 stand up in front of you and say in discovery there

10 were no questions asked about the 2005 audit.

11 We prepare an expert report -- because there

12 were. We prepare an expert report that comments and

13 criticizes some of the work in the 2005 audit.

14 Pricewaterhouse responds to that expert report in

15 more than 169 paragraphs, and we depose both experts,

16 and now we're ready for trial.

17 And it's at this point that Pricewaterhouse

18 says: No, it's not fair. We found some paragraphs

19 in your Petition that didn't mention 2005. We're

20 going to ignore the ones that do. And we're going to

21 tell you now that we're entitled to summary judgment.

22 And, Your Honor, frankly, I just don't think that's

23 how notice pleading works in Oklahoma, and if that's

24 the only argument they've got for you in summary

25 judgment, then it should be overruled.


81


2 Yes, sir?

3 MR. RABINOVITZ: What matters, Your Honor,

4 are these paragraphs in the Complaint and the other

5 ones highlighted in our Petition. These are the ones

6 that set out what audits and what financial

7 statements the Plaintiffs claimed do not comply with

8 generally-accepted auditing standards and did not

9 comply with generally-accepted accounting principles.

10 In other words, these are the paragraphs where the

11 Plaintiff tells both you and us: Here are the audits

12 that we are putting at issue in this case; in other

13 words, that we're attacking.

14 Now, obviously, there could be earlier years

15 or sometimes later years that are relevant for other

16 purposes. And, in fact, you have ruled on a motion

17 in limine on this already, saying: Sure, information

18 that was learned in the 2004 audit or was learned in

19 the 2005 audit could be relevant to the work done in

20 the 2006 or 2007 audits. And that is exactly the

21 paragraphs that Mr. Keglovits showed you.

22 If we look behind Tab 4 and look at the

23 paragraphs that he is pointing out, it becomes clear.

24 Let's start with Paragraph No. 1. This is

25 introducing; right? So right under the caption that


82

1 says Preliminary Statement, the Petition is telling

2 the Court and us the story; right? So this arises

3 from egregious instances of auditor malpractice.

4 PwC was the outside auditor for SemGroup for these

5 years.

6 Not saying these are the audit years that are

7 being attacked in this lawsuit; not saying that the

8 financial statements that were audited in those years

9 were misstated or did not comply with the accounting

10 rules.

11 If we flip to Paragraph 66, the next

12 paragraph that Mr. Keglovits put up. PwC was aware

13 of the Westback arrangement Kivisto had devised with

14 SemGroup. PwC received a copy of the agreement dated

15 March 2006 signed by Kivisto; right? Again, telling

16 us, Your Honor, PwC knew about this from an earlier

17 audit year, Judge. So they did it wrong in 2006 and

18 in 2007.

19 Now, how do we reach that interpretation?

20 Well, flip backwards to the paragraphs that are

21 immediately before Paragraph 66, and they all -- they

22 go together. It's Paragraph 53 through 65. These

23 are the paragraphs that lay out their claim about

24 Westback.

25 Starts with 53, where again -- and this is


83

1 what I had put up on the screen before -- they made

2 quite clear: The Westback receivable footnote, that

3 part of the financial statements was misstated in

4 2006 and it was misstated in 2007.

5 And then they break it down year by year,

6 Your Honor. So paragraph 54 gives you the footnote

7 from 2006. Paragraph 55 through 62 elaborate about

8 the 2006 audit year. And Paragraph 63, they change

9 to 2007. And then do the same thing through

10 Paragraph 65; they break down the 2007 financial

11 statement disclosure.

12 And so that's what leads up to and would be

13 the context for interpreting Paragraph 66. They say:

14 Judge, all these mistakes we just told you about in

15 2006 and in 2007, PwC knew about them because they

16 learned about them the year before in the 2005 audit.

17 And the parties agreed in the motion in limine

18 briefing, that, yeah, there are times when there is

19 information from prior audits that may be relevant to

20 a claim for audit malpractice.

21 But to say that somehow Paragraph 66 asserts

22 or gives anybody notice that the 2005 audit is being

23 attacked in this case is just fanciful. You can't

24 look at individual paragraphs, Your Honor. You have

25 to look at the Petition as a whole. And when they


84

1 lay out -- when they tell us specifically what audits

2 and what financial statements are at issue, it's

3 always every single time, bar none, '06 and '07.

4 Just to be complete, let's look at the final

5 paragraph that Mr. Keglovits pointed out. That's

6 Paragraph 169.

7 PwC breached the duty of care it owed to

8 SemGroup by violating these standards during the

9 course of its audits. And Mr. Keglovits sets us up

10 by saying: Well, we've previously defined the audits

11 at issue as being 2004 through 2008.

12 But that's not true, Your Honor. If we look back at

13 Paragraph 1, there was no attempt to define the

14 audits at issue, none at all, and they know how to do

15 it.

16 So if we look at Paragraph 41 -- and I'm

17 sorry to make you skip around -- in the Petition,

18 there is a formal way to define terms. When they are

19 defining a term for a petition, they say what they

20 mean, and then they put it in quotes and underline

21 immediately following the first use of the term.

22 So in Paragraph 41, they define what they

23 mean by 2006 consolidated financial statements. And

24 what they mean is the financial statements ending

25 December 31st, 2006.


85

1 In that same sentence, they define the term

2 2007 consolidated financial statements. Those are

3 the financial statements that ended with the year

4 December 31, 2007.

5 When they want to define a term in the

6 Petition, then they do, and they have a standard

7 practice for doing that. That's not what they did

8 with the audits at issue. Rather, they specified in

9 38 paragraphs which audits were at issue here. Never

10 did they say that the 2005 audit was at issue.

11 Now, before I rest on this, and I know you have

12 questions on the second issue as to statute of

13 limitations, I want to answer the discovery requests

14 point.

15 It's true that PricewaterhouseCoopers

16 produced its 2005 work papers, and it's also true, by

17 the way, that they produced the 2004 work papers.

18 And by the way, under Mr. Keglovits's analysis,

19 apparently we now have a claim based on the 2004

20 audit, too, but nobody's telling you that; not the

21 Plaintiff, not the Plaintiff's Petition, not even the

22 Plaintiff's experts.

23 But if we interpret the Petition, as

24 Mr. Keglovits has now told you you should, really

25 there are four audit issues, four audit years at


86

1 issue here. And we know that's not true, Judge,

2 because even Mr. Keglovits is not standing up here

3 and telling you it is.

4 So we produced the 2004 and the 2005 work

5 papers with objection, but we did it, because, again,

6 for the purpose that we conceded in the motion in

7 limine briefing, which is there are times when

8 information learned in earlier audits is relevant to

9 a later audit. But each audit year, Your Honor, is

10 governed by a separate contract, each audit year is

11 of a different set of financial statements, and each

12 audit year is done by different auditors. So there

13 is some overlap year to year, but not -- it's not the

14 same auditors in every year.

15 And, in fact, specifically as to Westback,

16 the auditing was different than 2005. There was one

17 key auditor in '05, who was the senior reviewer or a

18 senior reviewer on the Westback work, and he was

19 never deposed in this case, although the Plaintiff

20 deposed 22 members of PricewaterhouseCoopers' current

21 and former. Never deposed. Not on anybody's witness

22 list. We've had no notice that he even might be at

23 issue here or we would need his testimony. There is

24 real prejudice to PwC in permitting a claim based on

25 the 2005 audit now.


87

1 Now, if there are questions on the second

2 issue, I am to happy answer them, Your Honor.

3 THE COURT: No. I have questions now for

4 him.

5 MR. RABINOVITZ: Okay. Thank you.

6 THE COURT: Okay.

7 Mr. Keglovits, can you explain for the Court

8 then -- I mean, obviously, I am not privy to what you

9 do in discovery and whatnot. There is a difference

10 between -- and I remember the motions in limine that

11 I ruled on. It's almost like res gestae; it's

12 something that goes along that ends up causing the

13 harm, but it's not the claim itself.

14 It could be that your experts are using the

15 previous information that was then used to evaluate

16 the company in 2006 and 2000 and -- like the 2007

17 audit was using information from '5 and '6. That's

18 very possible. I am not privy to that information.

19 The first question is -- I don't think the

20 Court would limit -- and I don't think I did in the

21 motion in limine -- the fact that the experts would

22 be able to say when you're doing an audit or you're

23 rendering a financial statement that you're going to

24 be using information from previous years, and in the

25 2006 audit or financial statement which we are


88

1 finding faulty, we made -- we used numbers from 2005,

2 which was incorrect for these reasons. But that's

3 different argument than claiming that the entire

4 financial statement, if one was issued in 2005, was

5 against GAAC (sic) or GAAP, because that is a totally

6 separate claim on a totally separate audit or

7 financial statement.

8 Can you clarify for me what the Plaintiff is

9 actually trying to do before we get any further with

10 this discussion?

11 MR. KEGLOVITS: We have a specific criticism

12 to which damages are attached and it has to do with

13 the disclosures that were not made, but should have

14 been made, in the 2005 audit. And that's that

15 Paragraph 66 that I pointed you to.

16 THE COURT: Okay. On the Westback?


18 THE COURT: Okay. And if you could answer,

19 then, his interesting argument about the fact that

20 you were very -- it's almost like a statutory

21 interpretation problem, when you're looking at the

22 Petition as a statute and you say: Well, you defined

23 things very specific and strictly constructed versus

24 something that's more vague. You always go to the

25 more defined area of the statute to determine what


89

1 the intent is.

2 And in here in the Petition, is there some

3 reason why, then, if you have specific claims against

4 a separate year audit that you do not lay out that

5 year specifically within those claims, like you do

6 throughout the Petition in 2006 and -- or 2007 --

7 now, I'm going to get confused -- 2006 and 2007?

8 MR. KEGLOVITS: I would tell Your Honor, in

9 my view, because of the liberal notice pleading in

10 Oklahoma, we're not form pleading, which is what I

11 heard a lot of; you had to say these particular words

12 to be in court. We've got a very liberal notice

13 pleading standard. It is exactly the opposite of the

14 statutory construction rule that you're talking

15 about. There when you're interpreting a statute, if

16 you don't have a very liberal view of it, you have to

17 hew strictly to what the statute says.

18 In notice pleading, we just have to put them

19 on notice that there is a claim. And as you know,

20 when you are the Plaintiff, just about to start out,

21 you don't have the benefit of the discovery, you

22 really can't be as specific as Mr. Rabinovitz was

23 suggesting we should be.

24 And so what we did is we tried to tell him

25 and his client, based on what we knew at the time,


90

1 what potentially could be at issue, and we put a

2 specific component of the audit work they did in

3 2005, and that March 2006 letter, that comes before

4 the 2005 audit opinion is issued. We put that

5 specifically at issue in this Petition. And I don't

6 know that we need to do really that much, but we

7 certainly did that, and that's enough under notice

8 pleading to put them on notice that something they

9 did in connection with the 2005 audit is at issue.

10 Now, when Mr. Rabinovitz was talking about

11 that specific paragraph, 66, he asked you to consider

12 the preceding paragraphs -- let me get the numbers

13 right -- 53 through 65. But I'll just point out for

14 the Court, 53 through 65 is one section of the

15 Complaint; 66 -- or the Petition. 66 begins a

16 completely new section of the Petition. And 66

17 through 68, which is the section we're talking about,

18 is not limited to years. It includes the entire

19 amount of the Westback receivable, the 290 million

20 dollars in losses.

21 What they are really trying to do with this

22 motion, Judge, is cut the 290 million down, saying we

23 weren't on notice, so you can't claim all 290,

24 because that takes you back to the 2005 audit. Well,

25 as I said before -- and I hate to belabor it -- but


91

1 66 tells them a part of your 2005 audit was wrong, 68

2 tells we want the entire 290 million dollars in

3 damages.

4 THE COURT: So you're saying in 66 that it

5 qualifies under the Oklahoma notice provision that by

6 you saying the agreement dated March 20th of 2006,

7 that they were put on notice, but that since that

8 entailed or contained parts of the 2005 financial

9 statement that that was putting them on notice?

10 MR. KEGLOVITS: Yes. And I'll tell you for

11 the record, March the 29th, 2006, was the date that

12 PwC issued its audit opinion on the 2005 audit.


14 MR. KEGLOVITS: So this March 20, 2006 comes

15 nine days before they complete the audit and,

16 therefore, the disclosures that flow from what they

17 knew in that letter belong in the 2005 audit. And as

18 we looked at earlier this morning, the communications

19 about material weaknesses in internal control that

20 they were required to make in connection with the

21 2005 audit was also known before they issued their

22 opinion. So all of this information has to do with

23 the 2005 audit.

24 You know, I have done a lot of pleading and

25 you often get something that says: Defendant was


92

1 negligent. I claim all damages from the negligence.

2 You don't say in what years. It is very, very

3 liberal. And I think we did way more than we were

4 required to do by offering up this 200-paragraph

5 Petition. No good deed goes unpunished, because now

6 they're going to come back and point to places where

7 we said 2006 and 2007 but didn't also say 2005.

8 But the fact remains, we told them that we

9 had a problem with the 2005 audit, we told them we

10 wanted all of the damages going back to 2005, 290

11 million dollars, and I think that's enough.

12 THE COURT: Okay.

13 MR. RABINOVITZ: If I may, Your Honor.

14 THE COURT: Sure.

15 MR. RABINOVITZ: Under notice pleading, there

16 is two things that you can do. You can put somebody

17 on notice that claims are at issue and you can also

18 put them on notice that claims are not at issue. And

19 I don't want to beat this to death, but these are the

20 two paragraphs that lay out as a general matter the

21 audits that are at issue here and the financial

22 statements.

23 So it's not just is Paragraph 66 enough?

24 It's not. But it's not just that, it's that they

25 told us specifically what audits were at issue and


93

1 what financial statements were at issue. So even

2 under notice pleading, it's not -- the question for

3 the Court is were we put on notice; and it's not just

4 what they said affirmatively about '05, it's what

5 they said affirmatively about '06 and about '07. And

6 what they said was: Hey, guys, we're going to

7 tell you -- whether we need to have dates in a

8 Petition or not, Mr. Keglovits and I can disagree

9 about -- but they put dates in, and the dates that

10 they put in were '06 and '07 each and every time. It

11 is simply not fair. It's not fair to

12 PricewaterhouseCoopers, because it's too late to

13 pursue discovery of these issues now. It's simply --

14 it's simply unfair to allow a claim in. It's

15 opportunistic on the Plaintiff's part. It's not in

16 the Petition and it's not in their expert report that

17 underlies the Petition.

18 THE COURT: Now, you're not claiming that

19 they can't talk about it?

20 MR. RABINOVITZ: We are not claiming that if

21 there is information that is relevant to the '06 and

22 '07 audits that was learned in '05 or '04 that that

23 would be barred. In fact -- and we briefed it, Your

24 Honor. So --



94

1 MR. RABINOVITZ: -- you're aware of our

2 position. And we might disagree about specifically

3 what's relevant and what's not, but as a general

4 matter, that's absolutely right.

5 (Off the record.)

6 MR. RABINOVITZ: I apologize.

7 But what's important, Your Honor, is the audits

8 that are at issue, because there are real dollars

9 associated with it and they're new. It was first

10 alleged in April of 2013.

11 If there are no further questions, Your

12 Honor --

13 THE COURT: Okay. Well, what we're going to

14 do is -- I don't have any further questions and I am

15 going to think about this and decide if I need to

16 think about it more or make a ruling on it -- but

17 it's 10 after 12, so I was actually going to break

18 from 12 to 1 for lunch.

19 So at this point, we're ten minutes into

20 lunch break. Sorry. We're going to break until 1:00

21 for lunch break and then we'll be back. We hope you

22 come back and listen and I think the attorneys are

23 doing a great job.

24 All right. We'll be in recess. Thank you.

25 (Lunch recess taken.)


95

1 THE COURT: All right. Welcome back,

2 everybody.

3 All right. I do have a question on the last

4 issue, and I think I'm going to need some time to

5 think about that one, so you guys aren't going to get

6 to eat the frosting off the donut first for this

7 argument, but --

8 Actually, it's for you, Mr. Rabinovitz. Is

9 there some reason why you waited until the motion for

10 summary judgment to raise this issue instead of

11 filing for a motion to dismiss to challenge the

12 sufficiency of the Petition?

13 MR. RABINOVITZ: Because we didn't know that

14 the 2005 audit was at issue when they filed the

15 Petition, Your Honor. It wasn't. So the first time

16 we found out that they believed there was a claim to

17 be tried to the 2005 audit was in April 2013, and so

18 this is now the next time when we have to file a

19 motion on it.

20 THE COURT: Okay. So, yeah, my next question

21 was going to be -- and obviously you didn't, because

22 that's your issue, is you weren't put on notice. So

23 you found --

24 MR. RABINOVITZ: Correct.

25 THE COURT: -- out during discovery or when


96

1 the expert report was submitted?

2 MR. RABINOVITZ: Not until the expert report

3 was submitted, correct.

4 THE COURT: All right. Okay. That was my

5 question. Thank you very much.


7 THE COURT: Yes, sir.

8 MR. KEGLOVITS: I don't know if I can respond

9 to that, Your Honor.

10 THE COURT: Sure.

11 MR. KEGLOVITS: But the allegation I pointed

12 to you this morning, Paragraph 66, that's what's in

13 the expert report, and only that; we haven't

14 broadened it beyond that. It's not a comprehensive

15 criticism of the 2005 audit. It's simply that

16 Westback issue that we pulled out. And so if that

17 was there in the Petition, and I don't know whether

18 he could have challenged it on a motion to dismiss or

19 not, but it was there.

20 THE COURT: Okay. But you are saying

21 again -- and just so I can be clear -- is that under

22 Paragraph 66 and the paragraphs after that for the

23 Westback relationship transactions that are alleged

24 in the Petition, it talks about Pricewaterhouse

25 received a copy of an Agreement dated March 20th of


97

1 2006, signed by Mr. Kivisto, and that was just about

2 their relationship? But 66, 67, 68, those paragraphs

3 are what you are saying are sufficient under the

4 notice pleading that the 2005 audits were incorrect?

5 MR. KEGLOVITS: Yes. And to be clear in 66,

6 that March 20, 2006 document just didn't come to

7 Pricewaterhouse. They came across the Westback

8 relationship in the course of their audit, and they

9 required SemGroup to create a document, a written

10 record, of what was going on. And so that's how that

11 document got created; it was part of the 2005 audit.

12 At PwC's direction that audit -- that document was

13 created.

14 THE COURT: Okay. I understand.

15 Yes?

16 MR. RABINOVITZ: I agree with Mr. Keglovits

17 to a certain extent, there is no dispute, Your Honor,

18 that PwC was aware of and audited the Westback

19 receivable in the 2005 audit. SemGroup told them

20 about the receivable and Westback -- and PwC audited

21 it. That's not the question, though. The question

22 is did Plaintiff in his Petition plead a claim; and

23 there -- there is where we depart.

24 THE COURT: Okay. Thank you.



98

1 THE COURT: That's clarified. I do have some

2 thinking to do on that, based on those arguments, and

3 I'm going to wait. Maybe I'll think about it enough

4 on breaks that I can make a decision, but right now I

5 don't feel comfortable doing that. I have some more

6 things I want to think about, so...

7 Okay. Let's move on to another issue then,

8 if everybody's ready. That would be the very

9 interesting issue of whether PricewaterhouseCoopers

10 was not SemGroup's fiduciary, summary judgment issue

11 number three.

12 Is that yours?

13 MR. RABINOVITZ: You've drawn me again, Your

14 Honor.

15 THE COURT: Okay.

16 MR. RABINOVITZ: Your Honor, may I?

17 THE COURT: Yes, thank you very much. If I

18 said no...

19 MR. RABINOVITZ: I'm not sure what I would

20 do.

21 THE COURT: I don't want those. Oh, this

22 argument is going to be really interesting.

23 MR. RABINOVITZ: For me, too, Your Honor.

24 THE COURT: I thought both of you raised

25 interesting arguments, so I'm curious.


99

1 MR. RABINOVITZ: If the Court's ready?

2 THE COURT: Yes, sir. Go right ahead.

3 MR. RABINOVITZ: I'd start with this:

4 Almost every court in the country, Your Honor, that

5 has considered the issue has held that unless there

6 are special circumstances, independent auditors are

7 not fiduciaries of their clients, and the rational in

8 all of these cases is that auditors have an

9 obligation to be totally independent from their

10 clients, which is inconsistent with the duties that a

11 fiduciary owes its client, and that prevents auditors

12 from agreeing to serve as fiduciaries or to take

13 obligations that the law considers to be fiduciary

14 obligations.

15 Now, here --

16 THE COURT: But none of the cases that we --

17 there is no Oklahoma case that says that.

18 MR. RABINOVITZ: No.

19 THE COURT: Okay.

20 MR. RABINOVITZ: No Oklahoma court has ruled

21 on this issue, Your Honor.

22 THE COURT: I mean, if we look at -- you have

23 Robertson vs. Paine Webber that talks about broker

24 relationships.

25 MR. RABINOVITZ: Right. There are -- there


100

1 are plenty of Oklahoma cases about fiduciaries, but

2 none about whether independent auditors are

3 fiduciaries.

4 (Off the record.)

5 THE COURT: But you gave me plenty that I

6 read about other State's recommendations about that.

7 MR. RABINOVITZ: Right.

8 THE COURT: Okay. I just wanted to make sure

9 I was clear. Okay, keep going. Sorry.

10 MR. RABINOVITZ: And so here, Your Honor, we

11 presented this argument on our motion to dismiss, and

12 Judge Cantrell ruled, and I put up on the screen and

13 it's at Tab 1 in your binder as well. Judge Cantrell

14 denied PwC's motion to dismiss on this issue, quote,

15 to allow further factual development of the issue.

16 He just issued a minute order, Your Honor, and we

17 just printed it off and highlighted the last sentence

18 of his Order.

19 THE COURT: Sure.

20 MR. RABINOVITZ: Now, the parties were able

21 to do this. We have now developed the facts on this

22 issue and the facts are clear, there was no fiduciary

23 duty between SemGroup and PricewaterhouseCoopers, and

24 there is two reasons for that.

25 The first is that there was no meeting of the


101

1 minds that PwC would be SemGroup's fiduciary or that

2 PwC would undertake obligations to SemGroup that

3 Oklahoma considers to be the obligations of a

4 fiduciary.

5 Second, there was no special circumstance

6 about the PwC/SemGroup relationship that would cause

7 the Court to depart from the normal rule that

8 independent auditors are not fiduciaries. SemGroup

9 hired PwC to audit its financial statements, and

10 auditing financial statements under

11 generally-accepted auditing standards is not a

12 fiduciary relationship.

13 So let me take those points in that order:

14 A meeting of the minds, no special circumstances in

15 this case to depart from the general rule.

16 So Oklahoma has been clear for some time now that to

17 form a fiduciary relationship, there must be, quote,

18 some form of agreement, either express or implied,

19 from which it can be said the minds have been met to

20 create a mutual obligation. That, Your Honor, is the

21 Lowrence case from the Oklahoma Supreme Court. And

22 the evidence here is clear that no such agreement

23 existed.

24 In each year that PwC audited SemGroup's

25 financial statements, PwC and SemGroup signed a


102

1 written contract called an Engagement Letter that

2 governed the work that PwC was going to do for

3 SemGroup. And that's at Tab 2 of your binder, Your

4 Honor, and I put up one of the contracts on the

5 screen, although the contracts are the same every

6 year.

7 In the contract, PwC and SemGroup agreed on

8 two important concepts, one sentence and then the

9 next. First, they agreed that this contract, the

10 Engagement Letter, reflects the entire agreement

11 between us relating to the services covered by this

12 letter; in other words, to the audit services. So

13 the contract is it. This is our agreement.

14 In sentence two, the contract, quote,

15 replaces and supercedes any previous proposals,

16 correspondence, understandings, whether written or

17 oral.

18 So that's what the contract does. The

19 parties agree that this encapsulates our whole

20 agreement and it dissolves anything that came before

21 it.

22 THE COURT: So let me ask you, just so I am

23 clear on what you're arguing --

24 MR. RABINOVITZ: Uh-huh.

25 THE COURT: -- I think you're arguing


103

1 alternative arguments, because, number one, I thought

2 you were arguing that because of all the case law

3 that should influence me from other states and the

4 Patton -- I think it was Lowrence vs. Patton case

5 here in Oklahoma, that doesn't necessarily talk about

6 auditors, but -- and I think you're going to get to

7 this, I don't want to skip ahead. I kind of do in my

8 questions.

9 MR. RABINOVITZ: I'll skip to wherever you

10 want, Judge.

11 THE COURT: I'm thinking you want me to parse

12 out a per se rule that says that since the GAAP and

13 GAAS -- I hope I'm saying that right.


15 THE COURT: -- state independent auditor's

16 relationships aren't -- they don't have fiduciary

17 relationships with their clients. And the fact that

18 you're -- I need to know if your argument right now

19 is: That's what we want, Judge, period. But

20 however, if you don't agree with those cases or the

21 per se rule that auditors in themselves or

22 accountants in themselves are always not in this, you

23 know, loyal relationship because of the role they

24 take as an auditor, argument number one.

25 MR. RABINOVITZ: Yep.


104

1 THE COURT: Then argument number two would be

2 that if I'm not going to say it's a per se rule that

3 is fact-determinative and all the facts lead towards

4 the summary judgment motion that proves that, yet

5 again, you do not have a fiduciary relationship. Is

6 that correct?

7 MR. RABINOVITZ: No. You've got the

8 arguments right, but let me -- it's good that you

9 have asked the clarifying question --

10 THE COURT: Okay.

11 MR. RABINOVITZ: -- because now I can

12 clarify. We are not asking the Court to adopt a per

13 se rule that independent auditors are never

14 fiduciaries.

15 THE COURT: Okay.

16 MR. RABINOVITZ: That is certainly PwC's

17 position and we advanced it on the motion to dismiss.

18 But now that we've had fact discovery, you actually

19 don't have to get to that question.

20 THE COURT: Okay.

21 MR. RABINOVITZ: All you have to decide is

22 whether PricewaterhouseCoopers was SemGroup's

23 fiduciary here, and I offer two reasons why it was

24 not.

25 THE COURT: Okay.


105

1 MR. RABINOVITZ: One is that there was no

2 agreement.

3 THE COURT: Right.

4 MR. RABINOVITZ: And two, was that there was

5 nothing different about this relationship, the

6 PwC/SemGroup relationship, that would separate it

7 from all the precedent we've given you that hold that

8 the general rule is that auditors aren't.

9 So both of those are fact questions and there's

10 undisputed facts.

11 THE COURT: Okay.

12 MR. RABINOVITZ: There are no disputed facts.

13 THE COURT: Great. Which one of them is that

14 you're presenting me is: Here is our --

15 MR. RABINOVITZ: Is the contract. Right. So

16 that's where I want to --


18 MR. RABINOVITZ: I apologize, Diana.

19 THE COURT: No, that's fine. Got it.

20 MR. RABINOVITZ: So where I want to start is

21 the contract.

22 The contract says this is the whole agreement

23 and dissolves everything before it. And nowhere in

24 the contract is there anything that creates a

25 fiduciary relationship or that creates the types of


106

1 obligations that Oklahoma considers to be a

2 fiduciary's obligations.

3 Let me add, by the way, that it's not just

4 the contract, but the testimony of Mr. Alex

5 Stallings, who was SemGroup's chief accounting

6 officer, and who was in charge of hiring

7 PricewaterhouseCoopers in each year. He signed both

8 of the contracts at issue here.

9 And he was asked: Do you know of any duties

10 that the auditors had to SemGroup that were not in

11 these contracts, DX 215, 213 and 214, which are three

12 of the engagement letters, and he said no.

13 So it's not just the contract, Your Honor,

14 it's also the testimony of the person in charge on

15 the SemGroup side of hiring PricewaterhouseCoopers

16 saying the contract is correct. This is everything

17 that PwC agreed to do.

18 THE COURT: Stallings and Wallace and I

19 thought there was somebody else.

20 MR. RABINOVITZ: In 2006, Mr. Stallings was

21 the only person that signed the engagement letter.

22 In 2007, Mr. Wallace and Mr. Lietzke also signed the

23 letter, but Mr. Stallings testified that he was the

24 one who made the decision to hire PwC in each year.

25 Now, so the contracts say what they say and do not


107

1 create a fiduciary relationship, and the Plaintiff

2 has presented no evidence whatsoever that there was

3 any other agreement between SemGroup and

4 PricewaterhouseCoopers that occurred outside the

5 contract. And as a result, there is no genuine issue

6 of fact here that PwC and SemGroup did not have a

7 meeting of the minds for PwC to become SemGroup's

8 fiduciary.

9 Now, in response to Plaintiff tries to change

10 the standard for when a fiduciary relationship is

11 created. And what they argue is that a fiduciary

12 relationship was created because PwC, quote, fostered

13 and accepted the trust and confidence of SemGroup.

14 Your Honor, this is simply not the test for when a

15 fiduciary relationship is created.

16 Now, Plaintiff's citation, their primary

17 citation for this point, is to Paragraph 17 of the

18 Oklahoma Supreme Court's Lowrence decision.

19 But Plaintiff ignores the very next paragraph of

20 Lowrence, which I have blown up on the screen above.

21 And in that very next paragraph the Supreme

22 Court explains that rather, a fiduciary relationship

23 springs from an attitude of trust and confidence and

24 is based on some form of agreement, either express or

25 implied, from which it can be said the minds have


108

1 been met to create a mutual obligation, the very next

2 paragraph from where Plaintiff's primary source for

3 their position is.

4 So it's not consistent with the Oklahoma

5 Supreme Court's precedent that trust and confidence

6 are enough to create a fiduciary relationship. More

7 is needed. There has to be a meeting of the minds.

8 And further, if trust and confidence were

9 enough to create a fiduciary relationship, then

10 fiduciary relationships would be created in many

11 situations where the Oklahoma courts have already

12 held they don't exist. And let me give you a few

13 examples, Your Honor.

14 People have trust and confidence in their

15 banks, both to safeguard their money, and also often

16 to safeguard confidential information they may give

17 them to secure a home loan or other types of

18 financial services.

19 But the Oklahoma Supreme Court has held often

20 that bankers are not fiduciaries, specifically in

21 three cases that we've cited in our briefs and that

22 are in the binder of cases I have held up, that I

23 have passed up, which is the Beshara, the Kissee, and

24 the Honey Creek Entertainment cases. In all three of

25 those cases the Oklahoma Supreme Court held that


109

1 bankers are not fiduciaries to their clients.

2 Next example. Parishioners trust and have

3 confidence in their archdiocese. But the Oklahoma

4 Supreme Court affirmed summary judgment disposing of

5 a fiduciary duty claim against the archdiocese of

6 Oklahoma City, even though the archbishop admitted in

7 deposition that there is, quote, a special bond of

8 trust between the archbishop and his parishioners.

9 That wasn't enough. That's the Schovanec case, Your

10 Honor, also in the binder I've handed up.

11 And, finally, people who buy insurance may

12 trust their insurance company or insurance agents to

13 explain to them important details of their policy or

14 to make sure that they are adequately informed before

15 they waive important coverage. But even so, the

16 Oklahoma Supreme Court has held that insurance

17 companies are not fiduciaries of their insureds.

18 So even though trust is a key part of what insurance

19 companies sell, Your Honor, even though you're in

20 good hands with Allstate, Allstate is not your

21 fiduciary. And that's the Silver case also in the

22 binder I've handed up.

23 Finally, Your Honor, trust and confidence

24 does not literally mean trust and confidence in

25 precedent where it is used, rather it's a legal term


110

1 of art that requires trust and confidence such that

2 the beneficiary substitutes the fiduciary's will for

3 its own. They agree you are more experienced here

4 and you should act for me in this matter, and this is

5 directly addressed in the Standard Chartered

6 decision, which is also in the packet that I've

7 handed up.

8 So trust and confidence is not enough, Your

9 Honor; mutual agreement is required. And here there

10 is no evidence of an agreement between

11 PricewaterhouseCoopers and SemGroup other than the

12 contract signed by the parties, which itself also

13 agrees that it is the full extent of the parties'

14 agreement and that it dissolves any other agreements

15 that came before. Nothing about that contract

16 suggests the creation of fiduciary relationship.

17 And so there is no issue to be tried. There

18 was no meeting of the minds and there was no

19 fiduciary relationship or agreement on PwC's part to

20 accept the obligations that Oklahoma considers to be

21 a fiduciary's obligations. So that's point one.

22 The second reason that PwC was not SemGroup's

23 fiduciary is that PwC's duties as SemGroup's

24 independent auditor were inconsistent with the duties

25 that Oklahoma considers to be the duties of a


111

1 fiduciary.

2 So if we look in Tab 5 of your key documents

3 binder, Your Honor, is AU 220, and you saw this last

4 week also, Your Honor.

5 AU 220 is the GAAS standard, G-A-A-S, that

6 instructs auditors on their independents requirement,

7 their requirement to be independent of their clients.

8 And here is what it says: Auditors must be, quote,

9 without bias with respect to the client, since

10 otherwise he would lack the impartiality necessary

11 for the dependability of his findings.

12 That's Paragraph .02.

13 Paragraph .03, the auditor must be, quote,

14 free from any obligation to or interest in the

15 client, its management, or its owners. That's

16 Paragraph .03.

17 And in that same paragraph, it also says that

18 auditors must, quote, avoid situations that may lead

19 outsiders to doubt their independence.

20 Now, the U.S. Supreme Court has then summed

21 up the auditor's independent standards in the Arthur

22 Young case. And it summed it up by saying:

23 Independent auditors must, quote, maintain total

24 independence from the client at all times.

25 So now, Your Honor, if we look to Tab 6 of


112

1 your binder, and I'll put it up on the screen. And

2 if we compare these duties of an auditor to be

3 independent with the duties of a fiduciary, under

4 Oklahoma law, we'll see that they're inconsistent.

5 Under Oklahoma law a fiduciary has a duty of loyalty,

6 care, and obedience to the client. They have to obey

7 the client. Under Oklahoma law a fiduciary is,

8 quote, bound to act for the benefit of another.

9 And then, finally, under Oklahoma law, a fiduciary,

10 quote, cannot place himself in any other position

11 which would subject him to conflicting duties. All

12 three of these cases from the Oklahoma Supreme Court.

13 These duties of Oklahoma fiduciaries are inconsistent

14 with PwC's obligation to be independent under AU 220.

15 PwC could not agree to obey SemGroup. It could not

16 agree to act for SemGroup's benefit. And the reason

17 it couldn't do these things is that PwC was bound to

18 follow the accounting and auditing guidance, even if

19 SemGroup asked it not to, and even if, following the

20 guidance, would hurt SemGroup.

21 And the trustee of Plaintiff, Ms. Whyte,

22 admitted this in her deposition and testimony we have

23 cited in the brief. She said, if the auditors have a

24 choice between following the client's wishes and

25 following the accounting and auditing guidance, do


113

1 they have to follow the accounting and auditing

2 guidance, and she said, to her knowledge, yes. Thus

3 agreeing to obey SemGroup or to act for its benefit

4 would place PwC in a position of conflicting duties,

5 which is precisely what Oklahoma law prohibits.

6 For this reason, nearly every court that has

7 considered the issue has held that auditors

8 conducting financial statement audits, independent

9 audits, are not fiduciaries. And this is now Tab 7

10 of the key documents binder.

11 We can just take a look at some of the cases

12 I have put here. This was a three-page document and

13 then there are other cases also cited in the briefs

14 that I've left out of the slide. But we can see

15 summary judgment affirmed. Independent auditor does

16 not have an undivided duty of loyalty. Summary

17 judgment granted. The mere fact that an accountant

18 has been hired to audit a company has generally been

19 held to be insufficient to establish a relationship

20 of special trust and confidence giving rise to a

21 fiduciary obligation. Summary judgment granted. As

22 an independent auditor, D&D was not a fiduciary duty

23 of and owed no fiduciary duties to TSG. And the list

24 goes on, Your Honor. Motion to dismiss; granted.

25 THE COURT: Oh, believe me, I have read many


114

1 of these.

2 MR. RABINOVITZ: Then I'll stop just reading

3 to you.

4 THE COURT: Yeah, that's fine.

5 MR. RABINOVITZ: And I'll say this --

6 THE COURT: And I was going to say, I'm not

7 going to argue with you and I think you are correct

8 that what a fiduciary relationship is; what the

9 Lowrence v. Patton case described is what a fiduciary

10 relationship should be. I am really more interested

11 in the fact that you think these facts are presented

12 to the Court and they are undisputed and, therefore,

13 there isn't one.

14 Because I can tell you right now, he hasn't

15 gotten up or she hasn't gotten up to make their

16 argument yet, but I'm assuming they are arguing just

17 the opposite, that the jury instruction in Oklahoma

18 law says that you automatically do have a fiduciary

19 relationship, which I will address with them.

20 But for our discussion here, what I am

21 interested in is the fact that I think it's a very

22 fact-driven question and that it could be that you're

23 right. I think it goes towards whether or not there

24 are some facts that can be disputed that the

25 relationship changed at some point or that


115

1 PricewaterhouseCoopers had a relationship that went

2 above and beyond where there at some point was a

3 meeting of the minds.

4 MR. RABINOVITZ: I think that's -- I think --

5 THE COURT: You've cited me the contract.

6 You've told me about the standards that are presented

7 by your experts.


9 THE COURT: And you stated that you believe

10 that SemGroup's evidence shows there was only their

11 thought, but PwC never joined in that thought to make

12 it a meeting of the minds.

13 So is there any other facts that you think

14 are undisputed besides the contract itself or the

15 GAAP standards that your expert is going to talk

16 about?

17 MR. RABINOVITZ: Well, so, yeah, let's take

18 it one by one, Your Honor.

19 THE COURT: Okay.

20 MR. RABINOVITZ: There is two ways that we're

21 arguing this. First, no meeting of the minds.


23 MR. RABINOVITZ: Second, nothing unique about

24 this particular auditor/auditee --



116

1 MR. RABINOVITZ: -- relationship; right?

2 THE COURT: Right.

3 MR. RABINOVITZ: So as to the meeting of the

4 minds, we have the contract.

5 THE COURT: Right.

6 MR. RABINOVITZ: And we have Mr. Stallings'

7 testimony that supports the contract being the

8 entirety of the parties' relationship.

9 THE COURT: Okay.

10 MR. RABINOVITZ: So that's the evidence we

11 would rely on there.

12 And there is no evidence to the contrary,

13 none. There is not a single witness that had a role

14 in hiring PwC and agreeing, crafting the language or

15 the agreement with them as to what their obligations

16 would be, not a single witness that had a role in

17 that that said that PwC was SemGroup's fiduciary or

18 that PwC had any obligations that Oklahoma considers

19 to be a fiduciary.

20 And, in fact, there is only one witness ever

21 in the whole case that said he believed SemGroup

22 was -- PwC was SemGroup's fiduciary and he, on

23 cross-examination, conceded that he had no idea what

24 a fiduciary was under the law. So even if he had a

25 role, it wouldn't have mattered. But he had no role,


117

1 at least -- at least as far as the record shows, that

2 he had any role in hiring PwC or in the agreement

3 between the two parties.

4 THE COURT: But what about outside of the

5 hiring stage?

6 MR. RABINOVITZ: Well, that's right, Your

7 Honor.

8 THE COURT: Okay.

9 MR. RABINOVITZ: So we have now put this in

10 evidence --


12 MR. RABINOVITZ: -- and it's on the Plaintiff

13 to come up with actual evidence for its summary

14 judgment; allegations, not enough. What might happen

15 at trial, not enough. They've had the opportunity to

16 depose 22 PricewaterhouseCoopers' employees and a

17 slew -- I haven't counted -- of SemGroup employees.

18 There is no evidence that there was any agreement

19 other than the one that we've put before the Court,

20 or the "ones," because there is one for each year.

21 There is no evidence whatsoever that goes to the

22 agreement between the parties, either as to the fact

23 that there was no fiduciary duty or to suggest that

24 there was anything different about the parties'

25 relationship than a regular general rule


118

1 auditor/auditee relationship.

2 So, in other words, we have put forward our

3 prima facie case and the Plaintiff has come forward

4 with no evidence whatsoever to those two key fact

5 points.

6 THE COURT: Okay.

7 MR. RABINOVITZ: So if we come back to these

8 cases -- and I'll wrap it up and then I want to

9 address the jury instruction quickly. This is a

10 broad national consensus. It's not just one court;

11 it's not just one area of the country. This is

12 countrywide, courts consider auditors not to be

13 fiduciaries.

14 And before I get to the jury instruction,

15 Your Honor, I want to address the Plaintiff's cases,

16 because they give you five cases that they say are

17 courts that have gone the other way, and I think it's

18 worth addressing them, because the cases are

19 exceedingly weak.

20 The first case that the Plaintiff cites is

21 Dantzler Lumber. This is a 1934 Florida case that

22 does not mention a fiduciary relationship anywhere in

23 it. And, in fact, what it says is that auditors can

24 be sued for negligence.

25 More importantly, though, as to this case,


119

1 the Plaintiff ignores any more recent Florida case

2 from the year 2000 -- this is the KPMG case --

3 holding that auditors cannot owe an undivided duty of

4 loyalty to their clients.

5 The second case, Your Honor, that the

6 Plaintiff cites is the DeLorean case from the Eastern

7 District of Michigan's Bankruptcy Court, and that has

8 a single sentence on the issue, and all it says is

9 that auditors are fiduciaries. And then it cites to

10 a Michigan Court of Appeals' case that doesn't say

11 anything like that. It says that accountants, who

12 are not independent auditors, can be fiduciaries. So

13 it doesn't even prove their point.

14 Plaintiff then cites two Illinois cases,

15 Congregation of the Passion and Peterson, in which

16 the accountants at issue were not serving as

17 independent auditors. And Plaintiff neglects to tell

18 you that a federal court in Illinois has said

19 Congregation of the Passion can't represent Illinois

20 law, it can't be accurate as to independent auditors.

21 And, finally -- and this is the case I want to focus

22 on just for a second -- Plaintiff cites a case called

23 Slusser vs. Baird Kurtz & Dobson, which Plaintiff

24 characterizes to you as Oklahoma authority that

25 auditors can be fiduciaries. And Plaintiff says that


120

1 Slusser was a jury verdict in the year 2000 against

2 an auditor for breach of fiduciary duty in connection

3 with audits performed.

4 Now, the Court's file for Slusser was

5 destroyed because it aged out, and so after receiving

6 the Plaintiff's opposition brief, it took us a while

7 to actually get the file. We had to get the

8 microfilm file. And now that we've got that, we can

9 actually see the Complaint from the Dobson case. And

10 I put this at Tab 8 in your key documents binder,

11 Your Honor.

12 And what we see in the Complaint from Slusser

13 is that the breach of fiduciary duty claim was not

14 based on the accounting firm's audit, but rather was

15 based on the accounting firm's personal financial tax

16 and investment advice. And that proves our point,

17 Your Honor.

18 In this case, in this very same case, Count 3

19 of the Petition, that's at Tab 8, the Plaintiff also

20 pled a professional negligence claim against the

21 auditor for its audits, but when it came time to

22 craft a fiduciary duty claim, it didn't. It left out

23 the audits and it went solely to the personal

24 financial tax and investment advice that the

25 accounting firm apparently also offered to the


121

1 client. That's precisely what's missing here.

2 Here SemGroup hired PwC to audit its financial

3 statements and to do so under generally-accepted

4 auditing standards, and that's the work that the

5 Plaintiff challenges here, those audits. There are

6 no allegations about unique circumstances, and there

7 is certainly no evidence about unique circumstances

8 that would suggest that the auditors were performing

9 something other than the audit and doing something

10 else that would cause the Court to depart from the

11 general rule.

12 And this is consistent then, dismissing this

13 claim now, Your Honor, is consistent with the

14 Oklahoma Supreme Court's decision in Wilson vs.

15 Harlow, which I would submit is decisive on this

16 point.

17 In Wilson vs. Harlow, customers of OG&E sued

18 the company's board members, arguing that they owed

19 fiduciary duties to the company's customers. And the

20 Oklahoma Supreme Court held, and it held as a matter

21 of law, that the board members could not be

22 fiduciaries to the company's customers because it

23 would be inconsistent with other duties they had;

24 namely, the fiduciary duties that the board members

25 owed to OG&E itself and its stockholders. And so, as


122

1 a result, the Oklahoma Supreme Court directed the

2 lower court to enter an Order dismissing the case.

3 That's exactly what you have in here, Your Honor.

4 Here PwC's duties of independents under AU 220 were

5 inconsistent with the duties that the Plaintiff now

6 argues PwC would have under Oklahoma's fiduciary duty

7 law. And so it's plainly the case here that under

8 Wilson vs. Harlow, because those duties would be

9 inconsistent, the claim can't proceed.

10 Okay. Your Honor, OUJI 26.2.

11 THE COURT: Actually, I want them to talk

12 about it.

13 MR. RABINOVITZ: First? Okay.

14 THE COURT: Because you're kind of

15 rebuttal --


17 THE COURT: -- and I think I have enough

18 questions about it myself that, if I need you to give

19 me what you think, I'll give you that opportunity.

20 MR. RABINOVITZ: Okay. Sounds good.

21 Then let me close with this: Throughout Plaintiff's

22 argument is, essentially, the, at the very least,

23 implication that the Court just can't dismiss this

24 case, that Oklahoma courts send these claims to the

25 jury as a matter of routine and they don't get rid of


123

1 them pretrial. That's just not true. And this is

2 the final tab in your binder, Tab 9.

3 The Oklahoma Supreme Court and the Court of

4 Appeals consistently get rid of, as a matter of law,

5 fiduciary duty claims where they find that no

6 fiduciary relationship existed. We've got the

7 Schovanec case I told you about already, summary

8 judgment; Howell, which we've cited, summary

9 judgment; Kissee, Silver, Beshara, Wilson, and then

10 Cosper, all of these are fiduciary duty claims that

11 are dismissed, either at summary judgment or at the

12 motion to dismiss stage, and all but one of these

13 cases were Oklahoma Supreme Court decisions, and they

14 did that because it was clear that no fiduciary

15 relationship existed.

16 THE COURT: Thank you very much.

17 MR. RABINOVITZ: Thank you, Judge.


19 Mr. Keglovits, are you up again?

20 MR. KEGLOVITS: Me again.

21 THE COURT: Okay. I know this is not usually

22 what we do, but I have -- I just found your OUJI

23 argument interesting, and I would like to start with

24 that, if you don't mind.

25 MR. KEGLOVITS: All right. Can we throw it


124

1 up?

2 THE COURT: Yeah, that would be great,

3 because I already have -- I have an outline of

4 questions that I need to ask.

5 MR. KEGLOVITS: And while we're doing that,

6 Judge, can I just as an aside, you saw some testimony

7 from Alex Stallings in that presentation. You saw he

8 was asked questions about three engagement letters

9 for the 2007, the 2006, and the 2005 audit. So

10 further to our earlier discussion, this has been in

11 play for a long time.

12 THE COURT: Ah, got it. I wondered where you

13 were going with that. Okay. Got it.

14 Okay. Here are my questions for SemGroup or Bettina

15 Whyte's counsel on this argument that you had, which

16 I found very interesting.

17 Instruction 26.2 gives three different

18 options for the Court to instruct for the jury. And

19 usually what I do as a judge, when I am looking at

20 those instructions, is I also look towards the notes

21 where they tell you this is when a judge should use

22 or discard a certain part of these OUJI's; and

23 sometimes they're helpful and sometimes they're not.

24 This one really wasn't that helpful. But I did try

25 to look at the first, second and third, because I


125

1 think what they're saying -- the fact that they give

2 us a choice to me means there is different things

3 that can happen.

4 So my questions would be the first

5 alternative, which says: You are instructed that if

6 you determine that...and then they say for example,

7 and they put the word "accountant" in there. And

8 that is what I believe you all are saying, right

9 there, this is the instruction we should use and it

10 says accountant, which means that the jury -- you

11 should instruct the jury, pretty much like a directed

12 verdict, that there is a fiduciary relationship

13 between the two of you because of that relationship,

14 that they're an accountant and it's a relationship of

15 trust and, therefore, it exists, the duty exists.

16 Correct?

17 MR. KEGLOVITS: An accountant is no different

18 than an attorney.

19 THE COURT: Okay. Well, so I found that an

20 interesting argument, because if you go to the second

21 alternative in the OUJI, it states: You must

22 determine whether a fiduciary relationship exists in

23 this case between Plaintiff and Defendant, based upon

24 their relationship and the other circumstances in

25 this case. A fiduciary relationship exists, and it


126

1 goes on.

2 Now, the notes for that section -- let me

3 turn in my OUJI book. I don't know if you have them

4 or not. I apologize. I can read them slowly.

5 MR. KEGLOVITS: Pull up the notes, if you

6 would.

7 THE COURT: If you can get the notes.

8 They're like at the very bottom of the instructions.

9 Sometimes it will say: Notes on use.

10 MR. KEGLOVITS: Under the third alternative.

11 THE COURT: Oh, no. It will be under two.

12 I'm sorry. Under where it says how you use two,

13 which is what we were talking about.

14 It should say: The second alternative should

15 be used where the existence of a fiduciary

16 relationship depends on a disputed factual issue.

17 The Trial Court may need to modify this

18 alternative -- that's always fun -- to explain the

19 disputed factual issue. For example, by defining the

20 requirements for a guardianship.

21 Well, if we go up to Section 1, it states

22 what you were just talking about, where it's like a

23 directed verdict for an attorney. Guardian is also

24 in that option.

25 So under Section 1 -- I hope you're following


127

1 me -- under Section 1, options on Jury Instruction

2 26.2, it says: You are instructed that if the Judge

3 says that this is a guardian with this Plaintiff,

4 then there is a duty.

5 But then the OUJI gives you the alternative

6 where the notes say: Even though we're saying a

7 guardianship can be an automatic existence of

8 fiduciary relationship, we're going to let the Court

9 have an instruction where there could be a dispute on

10 whether the guardianship maybe was actually formed or

11 what the actual relationship in the guardianship

12 entailed factually to even make a fiduciary-type

13 relationship.

14 So, I guess, my big question is that you are

15 wanting me to claim in Oklahoma based on this OUJI

16 that says the word "accountant," that there is a per

17 se argument that always an accountant will have a

18 fiduciary relationship with their client, when I am

19 saying I don't necessarily think that's what this

20 OUJI says, because there is a second alternative

21 where it can say, it can be a factual dispute and it

22 can be up to the trier of fact or for summary

23 judgment up to the Judge, that it really does depend

24 on the facts behind the relationship on whether or

25 not there is a fiduciary relationship. Just because


128

1 the OUJI says the word "accountant" doesn't

2 automatically mean that I should find there is a

3 fiduciary relationship here.

4 So can you explain --

5 MR. KEGLOVITS: Sure.

6 THE COURT: -- or do you have anything to

7 offer on that train of thought that I have been on

8 for a while? Sorry.

9 MR. KEGLOVITS: No. I've looked at this jury

10 instruction a lot and, you know, I think the second

11 one, you are right. Taking the guardian, for

12 example --


14 MR. KEGLOVITS: -- if the Plaintiff is

15 saying: Defendant, you were my guardian; Defendant's

16 saying: No, I wasn't your guardian; then you might

17 move to argue from one to two, because there is a

18 disputed issue of fact about whether I ever agreed to

19 be your guardian or whether there was a new

20 instrument that appointed someone else your guardian

21 at the time of the acts complained of.

22 But I think what the OUJI Committee, as approved by

23 the Supreme Court, is trying to put in there is the

24 list of relationships that, as a general rule, give

25 rise to a fiduciary duty.


129

1 And I'll stop here to add -- and I have seen this in

2 the oil and gas context a lot -- you can have a

3 contract -- even in a partnership relationship, you

4 can have a contract that disclaims a fiduciary duty.

5 So you could have two partners who enter into a

6 contract and the contract says: By virtue of this

7 contract, we disclaim any fiduciary duty to the

8 other. So there you might have a classic

9 relationship that but for the contract that disclaims

10 a fiduciary duty, you would go to that jury

11 instruction. Of course, that's not what we have

12 here; we have no disclaimer of fiduciary duty in the

13 contract between the parties.

14 And I suppose, Your Honor, the question is

15 how do you go from two to three. I suppose --

16 THE COURT: I guess from one to two. Well,

17 one is I would just find that you guys have -- they

18 have a fiduciary relationship, period; and number two

19 is, if you find that there is an attorney -- excuse

20 me -- an accountant/client relationship, then the

21 jury can say there is a fiduciary relationship; and

22 then number three is we're trying to determine

23 factually if a fiduciary relationship has ever

24 existed.

25 MR. KEGLOVITS: And, you know, maybe what you


130

1 would do is, since one other argument seems to be

2 that auditors are not accountants, maybe you would

3 instruct the jury that if you find they were acting

4 as an accountant, then they are a fiduciary; if you

5 find they were acting as an auditor, then you look at

6 the facts and circumstances under three to determine

7 whether a fiduciary relationship exists, if you buy

8 the distinction that (inaudible.)

9 (Off the record.)

10 THE COURT: Maybe if the jury wants to shoot

11 us because we're making them decide yet something

12 else. So, no, don't buy that one.

13 MR. KEGLOVITS: Okay.

14 THE COURT: Yeah. I am trying to decide --

15 what I am telling you is, I find it interesting that

16 under the second section or choice of the OUJI that

17 you want me to rely on, uses one of the, quote,

18 things that are established by law to generally have

19 that relationship. But then under the third option,

20 they're using one of those, like a guardian, which

21 would be one of the more obvious, to show that there

22 can be a factual basis for that not to exist. And I

23 don't know of any Oklahoma case or why -- I mean, I

24 don't know why the OUJI Committee put those things in

25 there that they did. There is no case law citing


131

1 that those relationships have been established by

2 law. There is no case law in Oklahoma that I can

3 find or you all have cited for me that says an

4 accountant automatically has a fiduciary

5 relationship --

6 MR. KEGLOVITS: Just the OUJI.

7 THE COURT: -- because of that.

8 MR. KEGLOVITS: For the per se rule in favor

9 of the relationship, just the OUJI.

10 THE COURT: I don't think the Supreme Court

11 is going to support my decision that the OUJI says

12 it's so.

13 MR. KEGLOVITS: Okay. So then if we're

14 talking about the last alternative in that

15 instruction --

16 THE COURT: Sure.

17 MR. KEGLOVITS: -- then we're back to talking

18 about how the relationship is created --


20 MR. KEGLOVITS: -- and what the evidence is

21 on summary judgment.

22 THE COURT: Correct. Which is now your turn

23 to say these are the facts that are in dispute.

24 MR. KEGLOVITS: And so, if Your Honor would

25 indulge me, I would like to talk about -- leaving the


132

1 countrywide consensus aside, I would like to talk

2 about two Oklahoma cases that I think are going to be

3 very helpful to understanding what evidence we ought

4 to be looking for. And then we'll turn what the

5 Plaintiff -- or the Defendant -- I'm sorry -- has put

6 into the summary judgment record to see if any of

7 that touches on what they need to disprove to get

8 where they want to go.

9 THE COURT: Okay.

10 MR. KEGLOVITS: So let's start with the

11 Lowrence case. That's Lowrence v. Patton.


13 MR. KEGLOVITS: 1985 Oklahoma 95. And so a

14 little bit of background to understand the facts,

15 because often we pull sentences out of cases without

16 really understanding the context.

17 Mr. Richardson was a Veteran and

18 Mr. Richardson lived in the Oklahoma Veterans Center

19 over in Clinton, Oklahoma. And at that center, they

20 had accounts for the Veterans, and his had about

21 $9,000 in it. And when he came to the center, he

22 signed an account agreement that said: Upon my

23 death, I give the 9,000 or whatever's in there, to my

24 son.

25 So Mr. Richardson dies. And Mr. Lowrence,


133

1 the administrator of the Veterans Center, goes to the

2 account agreement, sees what the center and

3 Mr. Richardson agreed to, and pays 9,000 bucks to his

4 son.

5 THE COURT: To his son, right.

6 MR. KEGLOVITS: Well, it turns out, there was

7 a will.

8 THE COURT: Right.

9 MR. KEGLOVITS: You saw this.

10 THE COURT: In the probate.

11 MR. KEGLOVITS: And the will only gave $10 to

12 the son.

13 THE COURT: Oops. Don't think he liked his

14 son very much.

15 MR. KEGLOVITS: That's right. And what

16 happens, the administrator of Mr. Richardson's estate

17 sues Mr. Lowrence and the center saying you breached

18 a fiduciary duty to this guy.

19 So what was the evidence that the Court had

20 to consider there? There was no written contract

21 saying a fiduciary duty existed. Mr. Richardson was

22 dead; he certainly couldn't testify what the meeting

23 of the minds were. And Mr. Lowrence was denying the

24 existence of a fiduciary duty. And in the face of

25 all that, the Court directed a verdict against


134

1 Mr. Lowrence on fiduciary duty.

2 Ultimately, the Oklahoma Supreme Court

3 reversed the case on a venue ground, but in so doing,

4 talked about fiduciary duty and affirmed that the

5 duty existed.

6 So let's go to Paragraph 17, if you can blow

7 that up.

8 And this is the one that -- if we're going to

9 talk about a general rule in Oklahoma, this is the

10 one that sets out the general rule. It is

11 well-settled law that courts of equity will not set

12 any bounds to the facts and circumstances out of

13 which a fiduciary duty -- a relationship -- I'm

14 sorry -- may spring. It extends to every possible

15 case from which a fiduciary relationship exists in

16 fact and in which there is confidence proposed on one

17 side and resulting domination and influence on the

18 other.

19 So the general rule is there are no bounds.

20 Every time that someone comes to the courthouse

21 saying a fiduciary duty existed or a relationship

22 existed, it's incumbent upon the Court to examine the

23 record to see if that's the case.

24 So let's go to Paragraph 18.

25 So how did the Supreme Court affirm the


135

1 directed verdict for a fiduciary relationship when

2 nobody was there to testify that: Hey, we agreed

3 there's a fiduciary relationship. It was the

4 implication of the relationship. The fiduciary

5 relationship springs from an attitude of trust and

6 confidence and is based on some form of agreement,

7 either express or implied, from which it can be said

8 the minds have met to create a mutual obligation.

9 And then they talked about the statute that allowed

10 the creation of these accounts. And they said, by

11 virtue of that statute, in the relationship of care

12 and custody that existed at the Veterans Center, a

13 fiduciary relationship existed on the part of

14 Mr. Lowrence. Very far cry from the rule that you've

15 been led to believe by the Defendant exists, because

16 there's got to be a contract and a handshake and

17 everybody says: We're fiduciaries.

18 Let's look at the Clark v. Clark case, because a

19 feature of the argument you just heard was: Here's

20 the contract and the contract says this is the four

21 corners of our agreement and so all you can look at

22 is the contract.

23 Again, a little background on Clark v. Clark,

24 which is out of the Court of Civil Appeals.

25 Grandfather establishes a trust and gives grandmother


136

1 a life estate in the trust and gives his son the

2 remainder. Grandfather passes away; Grandmother

3 passes away.

4 In the meantime, Son had given his son the

5 role of trustee of this trust. So when Father -- I

6 guess, we'll call him -- now when his mother and his

7 father passed away, goes to son and says, "Where's

8 the $300,000 that's my remainder interest?" Son

9 says, "You know what, it's gone. It's spent."

10 So father is upset and he learns that son opened a

11 Merrill Lynch account in the Lawton office and he

12 brings a claim against Merrill Lynch, saying: You

13 should have known when my son, the trustee, brought

14 this account to the Merrill Lynch office, that it was

15 a trust. And you should have known or investigated

16 that I was the remainder interest and he wasn't

17 allowed to use the Visa card you gave him to go to

18 Vegas and buy trips, whatever he did. He wasn't

19 allowed to use the ATM to take $300,000 out of this

20 account.

21 And Merrill Lynch, said: Wait a minute.

22 We've got a contract between us and the trustee, the

23 bad son. And that contract defines the four corners

24 of any relationship we might possibly have, and that

25 contract -- first of all, it doesn't say where


137

1 anybody's a fiduciary. And second, compels us any

2 dispute about this account to go to arbitration.

3 Plaintiff was upset about that, but the District

4 Court sent the case to arbitration. The Court of

5 Civil Appeals reversed -- I'm sorry -- yeah -- the

6 Court of Civil Appeals reversed that decision.

7 Let's go to Paragraph 11. And this goes to the

8 important point. Merrill contended that it owed no

9 duty to Plaintiff outside of that arising from the

10 agreement, specifically asserting that in Oklahoma, a

11 fiduciary duty arises only from contract. Sound

12 familiar? Here is the four corners. It's the only

13 agreement we have. This is the only way a fiduciary

14 duty can be created.

15 Court of Civil Appeals says: We disagree.

16 That's not the only way a fiduciary duty can be

17 created in Oklahoma.

18 It goes on to say: Under Oklahoma law, a

19 fiduciary relationship exists whenever a trust is

20 placed by one person in the integrity and fidelity of

21 another. A fiduciary relationship is not confined to

22 any specific association party and no precise

23 language can define the limits of a relationship.

24 So in these two cases, where you have none of the

25 parties to the contract, either alive or testifying


138

1 that there's a fiduciary relationship, the Court

2 finds there is a fiduciary relationship. And we know

3 that here because the Court of Civil Appeals said you

4 don't have to arbitrate. This is a relationship that

5 grew outside of that contract. You can look to other

6 facts and circumstances to decide whether there's a

7 fiduciary relationship.

8 And so I would submit to you that the general

9 rule in Oklahoma is not as it has been advanced to

10 you by the Defendant. The general rule is that there

11 are no bounds. It can arise anywhere that trust and

12 confidence is reposed and accepted.

13 Now, to focus on PwC's summary judgment show.

14 I think there were four or five facts that they

15 submitted in support of summary judgment on this

16 issue. None of these facts negates trust or

17 confidence proposed in them by SemGroup. It's not

18 close to meeting the summary judgment standard.

19 The facts are simply limited to: Here is the

20 contract and here is the potential inadmissible

21 testimony of someone who signed the contract, saying

22 I don't think it created a fiduciary relationship.

23 None of the four facts touch on what the Oklahoma

24 courts are saying are actually the touchstone of this

25 relationship. Nobody from SemGroup is saying: We


139

1 did not trust PwC. Nobody from SemGroup is saying:

2 We didn't propose confidence in them, and nobody

3 from -- I'm sorry -- nobody from SemGroup is saying

4 that. And nobody from PwC is saying: We didn't

5 accept that trust and confidence. So there are no

6 facts in the record from which the Court could come

7 to the conclusion that a fiduciary duty or a

8 fiduciary relationship did not get created.

9 And, although I know it's not critical to make this

10 argument, I think it is important for the Court to

11 understand that this is a relationship that is one of

12 trust and confidence. You saw the testimony that we

13 put in in our response brief to that effect.

14 You have a situation where the management of the

15 company, the employees, can create financial

16 statements, reporting on their own results. You have

17 a company that is represented by its board of

18 managers in this case that asked the independent

19 auditor to come in and check what management has

20 done. Look at what the managers have put together

21 and tell me if those financial statements are right.

22 The board of managers are from all over the country.

23 They're not here in Tulsa running the company day to

24 day. They have to trust and place their confidence

25 in Pricewaterhouse that it will look at what


140

1 management does, without bias, and independently.

2 They can't take the side of management, as it creates

3 profits that aren't there, that generate bonuses for

4 management. They can't take the side of management

5 because they want to get hired the next year, because

6 management is the one that hires them. They have to

7 hew strictly to their code of professional

8 responsibility, which requires them to be

9 independent. That is the essence of their duty of

10 trust to this company to be independent. It's not

11 inconsistent; it's what they're supposed to do. And

12 I think the cases that don't get that, maybe even in

13 some of these other places, really miss the mark.

14 This is really a situation where the client relies on

15 the accountant to do what it said it would do. It

16 trusts it. It can't do anything else.

17 And I think the accountants recognize this,

18 too. You've seen the development of the law in

19 accountants over the last couple of years. They now

20 have a privilege that is stronger -- if you believe

21 some of them -- stronger than the attorney-client

22 privilege. They're regulated by their code of

23 professional responsibility. They are in those ways

24 no different than a lawyer.

25 And, you know, they like to talk about


141

1 loyalty all of the time, if you don't pledge your

2 undying loyalty to your client, you're not a

3 fiduciary. I don't pledge my undying loyalty to Ms.

4 Whyte. I have a set of rules that I have to follow

5 when I come before you and I can't advance a holding

6 in a case that's not right, even if it may be in her

7 interest to trick you. And I submit really it's

8 never in anybody's long-term interest to trick

9 anyone. And that's the same thing that auditors have

10 to do; they have to hew to their professional

11 standards and they have to be independent for the

12 protection of those who trust them.

13 THE COURT: Okay. Wait. I have a question

14 for you.


16 THE COURT: Can you tell me about any facts

17 that SemGroup has put forth to show that -- I mean, I

18 understand -- is your argument then the fact that

19 they are an accountant and that you put trust and

20 confidence in them and that there are facts and

21 testimony that that's the relationship that was

22 formed, do you have any facts that you want to offer

23 that show that either Pricewaterhouse went out of

24 their professional standards to not act

25 independently, for instance, started helping hide


142

1 certain things or becoming buddy-buddy and offering

2 more financial advice outside of the auditing

3 relationship? Any facts -- and it might be that

4 there aren't any. I am just saying are there any

5 that you are putting forth in this argument that you

6 can cite to me?

7 MR. KEGLOVITS: Well, I think if you look at

8 the expert report that we put together for

9 Mr. Turner, I think contained in there, there are a

10 couple of examples that I can point to that I think

11 are particularly powerful.

12 One of the auditing standards requires the

13 auditor to understand the business purpose of any

14 transaction that he's looking at. Makes a lot of

15 sense; right? I mean, you shouldn't be saying these

16 transactions are fairly recorded if you don't know

17 what they are. And, in fact, the footnote to that

18 section in the auditing standard says, if you don't

19 understand the business sense of a transaction, you

20 cannot complete your audit. Yet when we deposed the

21 auditors from Pricewaterhouse, they claim they had no

22 obligation to understand the business purpose of the

23 Westback transactions. All we had to do was write

24 down how much money was going out of the company. We

25 never had to once stop and say: Does this make any


143

1 sense that the CEO of the company is trading and his

2 losses are racking up to 300 million dollars? There

3 is no agreement for him to pay it back? There is no

4 interest? He is using our employees and our capital

5 to trade on those things.

6 They never once asked those questions, and an

7 inference from that is they favored his interest over

8 the interest of the company. I think that's a great

9 example of -- if you look at the way they disclosed

10 the Westback relationship, they say --

11 And, Janet, I wonder if you can put up -- I

12 think we had it as the timeline on the statute of

13 limitations.

14 Sorry, I threw them a curve ball. Okay.

15 Each of the three audit reports were 2005,

16 2006 and 2007. The disclosure in that report about

17 Westback ended with this sentence: There was no

18 impact to the consolidated statement of operations in

19 comprehensive income as a result of the Westback

20 transactions. No impact to those statements.

21 Yet we now know -- and it was known at the time that

22 the company was losing money. The company was

23 placing trades using its money and its employees for

24 Mr. Kivisto and PwC recorded those on the financial

25 statements as assets. Those losses were somehow


144

1 assets to SemGroup. So the readers of the financial

2 statements thought they were assets, when, in fact --

3 Mr. Turner talks about this in his report -- these

4 were losses, they always were losses, and they should

5 have been recorded as losses.

6 So the readers of the financial statements,

7 the owners of the company, the members of the board

8 of managers, who are trusting PwC to bring them

9 accurate information and to fulfill the promise in

10 their Engagement Letter to report on weaknesses in

11 financial reporting and control, those people needed

12 to know that they were losing this money, and they

13 were losing it through Mr. Kivisto, who, by the way,

14 was never named.

15 So these are examples of situations and

16 treatments in accounting that PwC blessed, sometimes

17 was the sponsor of the way to do it, and I think a

18 fair inference from that is that they favor the

19 interest of Mr. Kivisto over the interest of their

20 client, the company.

21 THE COURT: Okay. Yes, sir.

22 I might have more questions, but for now --


24 THE COURT: -- I'm going to go ahead and chat

25 with him for a second.


145

1 MR. RABINOVITZ: That's good. My head was

2 going to explode.

3 THE COURT: You know how I felt since I

4 inherited this case from Judge Cantrell.

5 MR. RABINOVITZ: I am feeling your pain.

6 Let me start where Mr. Keglovits left off, because I

7 think it's telling.

8 Your question to him was: Are there any

9 facts that you have evidence of that take this case

10 out of the realm of the normal auditor/auditee

11 relationship; and he gave you two examples.

12 The first is the auditors didn't follow the

13 audit standard regarding business purpose. In other

14 words, Judge, they didn't follow GAAS.

15 The second example was a criticism of

16 SemGroup's disclosure of Westback. And by the way,

17 that's not a misstatement on my part, that's

18 SemGroup's disclosure, not PricewaterhouseCoopers.

19 And Mr. Keglovits's accusation -- and I hope the

20 Court realizes that everything Mr. Keglovits said

21 factwise are just accusations. It's not worth

22 responding to them all one by one, the witnesses can

23 do that at trial, but they're not true.

24 But the accusation regards SemGroup's

25 disclosure of Westback, and Mr. Keglovits again says


146

1 PricewaterhouseCoopers should have, during its audit,

2 made corrections to that disclosure.

3 That proves my point. Those criticisms go to

4 SemGroup's performance of the independent audit of

5 SemGroup's financial statements. That is precisely

6 the relationship between an independent auditor and

7 its client under the GAAP and GAAS standards. And

8 that is precisely what all of the cases we have cited

9 show you is the right result, which is if auditors

10 have to be independent, they cannot be fiduciaries to

11 their client. And it's worth coming back to one of

12 the slides I showed you before, if we have switched

13 over.

14 THE COURT: But they can be if the

15 relationship changes in some way.

16 MR. RABINOVITZ: To the extent they are

17 providing services other than the service of an

18 independent auditor, the Courts leave room.

19 THE COURT: Or they get crooked in the middle

20 of the audit and they start doing things that lend

21 bad advice or they -- or in the business

22 relationship, their degree of power over that person

23 results in domination and influence over the client,

24 and it's outside of the audit responsibility. I

25 mean, I am just saying that is factually how it might


147

1 occur.

2 MR. RABINOVITZ: I would maybe agree with you

3 as to second part. The first part, the bad advice, I

4 don't think -- I don't think that I would agree with

5 you there, but --

6 THE COURT: Well, I meant -- that was -- as

7 in, like, "This is how I think you should be

8 trading."

9 MR. RABINOVITZ: Well --

10 THE COURT: "This is how I think you should

11 be investing." This is under the -- I mean, those --

12 what I'm saying is, the relationship grows -- what I

13 am trying to explain is -- you guys can beat it as --

14 MR. RABINOVITZ: I hear you.

15 THE COURT: -- long as you want that auditors

16 are independent, and I am agreeing with you.

17 But what I'm saying is that factually Oklahoma is

18 saying fiduciary relationships are not defined. They

19 are a factual anomaly that, depending on the facts of

20 the case, will determine whether there is a

21 relationship that's developed, in general; sometimes

22 it can be by law.


24 THE COURT: But what my question to him was

25 is -- and what you were saying is -- there is nothing


148

1 outside what we first talked about that shows that

2 someone in the auditing staff started giving other

3 advice outside of that that then formed a new implied

4 relationship.

5 MR. RABINOVITZ: And that was going to be my

6 ultimate response to your question, is that's not an

7 issue that the Court has to take up now, because

8 there is no evidence of anything like that, and

9 Mr. Keglovits's response to your question proves the

10 point. The facts show, the facts in the summary

11 judgment record show that the contract was the

12 agreement, the whole agreement, the entire agreement,

13 and nothing but the agreement, and that was the

14 parties' agreement. There is no evidence

15 contradicting that; nothing Mr. Keglovits said and

16 nothing in the Plaintiff's brief.

17 THE COURT: Right. I am totally in agreement

18 with that.

19 MR. RABINOVITZ: Okay.

20 THE COURT: What my issue is, then -- I keep

21 saying this -- is there something factually that can

22 be disputed outside of the hiring time?


24 THE COURT: Because that can happen.

25 MR. RABINOVITZ: It can, Your Honor. But in


149

1 summary judgment, we are past the point of cans.

2 THE COURT: No, no, no.

3 MR. RABINOVITZ: They have to --

4 THE COURT: What I am saying is, I need them

5 to tell me that it did, or that there is facts that a

6 jury can determine that it did.

7 MR. RABINOVITZ: That's right.

8 THE COURT: And you are telling me --

9 MR. RABINOVITZ: That they haven't.

10 THE COURT: -- there is nothing but the

11 contract. That's why we should stop there. Not that

12 the contract entails everything, but that that's the

13 only thing that we have and that nothing else has

14 been developed to show that a duty was developed.

15 MR. RABINOVITZ: I am actually telling you

16 both. I am telling you that --

17 THE COURT: I get the contract thing, so

18 I'm --


20 THE COURT: -- saying skip that.

21 MR. RABINOVITZ: Right. But my point also is

22 that once the parties have an agreement, that this is

23 going to be our whole agreement, it can't change.

24 THE COURT: Oh, I think it can.

25 MR. RABINOVITZ: Well, okay, then, we


150

1 probably, respectfully, disagree. Once you have a

2 legally binding contract that says these are the only

3 obligations we're undertaking, you would probably

4 have to amend that in writing. But, again, not an

5 argument the Plaintiffs made.

6 So the only thing the Court is presented with

7 here is the facts showing what the relationship is

8 from the PwC side and nothing, no facts whatsoever,

9 from the Plaintiff showing any other agreement of any

10 type, be it written or be it oral.

11 THE COURT: Okay.

12 MR. RABINOVITZ: Another way to address this,

13 Your Honor, is to think about what would happen if

14 the auditors were fiduciaries to SemGroup. So

15 Mr. Keglovits says: Well, Your Honor, they're

16 independent and SemGroup hired them to be the

17 independent fiduciary. That's why they hired them.

18 They had a fiduciary relationship to be independent.

19 That's not grounded in the law.

20 If we look at what Oklahoma says are the

21 responsibilities of a fiduciary, they have nothing to

22 do with what Mr. Keglovits has laid out. The duties

23 of a fiduciary are to obey the client, to be loyal to

24 the client, to act in the client's benefit. And then

25 the Supreme Court says can't have any conflicting


151

1 duties; not can conflict sometimes; as long as they

2 don't conflict all the time, you're okay. You can't

3 have any conflicting duties if you're a fiduciary.

4 That is not possible here, both factually, as the

5 facts are before the Court on the summary judgment

6 record and legally.

7 And then let me address both Lowrence and

8 Clark --

9 Well, before I do that, let me say that the

10 proof that trust and confidence is not enough to

11 create a fiduciary relationship is in all of the

12 Supreme Court decisions that I've cited. If trust

13 and confidence was enough, the Supreme Court -- the

14 Oklahoma Supreme Court could not have come out the

15 way it did in the three main cases: Beshara, Kissee,

16 and Honey Creek Entertainment. Because in all of

17 those cases, there were allegations that the client

18 trusted the bank. It couldn't have come out the way

19 they came out if trust and confidence --


21 MR. RABINOVITZ: Sorry.

22 -- if trust and confidence was enough. I'm

23 excitable. If trust and confidence was enough, there

24 would have been summary judgment for the Plaintiff in

25 the Schovanec case, because the archbishop of


152

1 Oklahoma City admitted there was a special bond of

2 trust between the archdiocese and its parishioners.

3 So not only did it not go that way, it went for the

4 Defendants as a matter of law on a motion dismiss.

5 And, finally, if it was true that trust and

6 confidence were enough, the Supreme Court couldn't

7 have come out the way it came in Silver where it held

8 that insurance companies are not fiduciaries of their

9 clients, even though the clients trust them.

10 THE COURT: Okay. I'm going to interrupt you

11 again, because I don't think anybody's arguing that

12 trust and confidence isn't something that's required.

13 But I also agree that under the Lowrence or

14 Lawrence --

15 However we're correctly pronouncing it. I

16 think it's Lowrence. Lowrence.

17 -- it states that you have to have confidence

18 and that trust. But you also -- that confidence and

19 trust has to result in the other party dominating and

20 influencing the other in that person's decisions;

21 correct?

22 MR. RABINOVITZ: Well, Mr. Keglovits is

23 arguing -- and the brief argues -- I don't mean to

24 attribute this just to him -- the Plaintiff is

25 arguing that trust and confidence are -- that is the


153

1 entirety of their brief.

2 THE COURT: Right.

3 MR. RABINOVITZ: They set it up and then they

4 give you a string of bullet points about trust and

5 confidence.

6 So I'm addressing it, only because I think

7 it's so critical that we -- that I understand or that

8 I lay out for you the right standard, because trust

9 and confidence is not enough. But if you've got

10 that, I'm happy to move on --

11 THE COURT: Okay.

12 MR. RABINOVITZ: -- and slow down.

13 THE COURT: What I'm saying is I've got it.

14 MR. RABINOVITZ: Okay.

15 THE COURT: What I am trying to say is, from

16 my understanding of fiduciary relationship and what

17 it means in Oklahoma and what the Supreme Court has

18 told us to look towards, is that there is an attitude

19 of trust and confidence, yes. How is that developed?

20 Well, it has to be developed by a meeting of the mind

21 that you both trust and are confident in each other.

22 That's usually going to happen in any type of

23 relationship that you have; there is going to be

24 trust and confidence going back and forth.

25 But what makes it a fiduciary relationship, in my


154

1 mind and under the case law, from what I am thinking,

2 is that that trust and confidence then is proposed on

3 one side, on one person, that results in domination

4 and influence over the other person.

5 MR. RABINOVITZ: That's correct, Your Honor.

6 Domination and influence, the substitution of the

7 will of the -- of the will of the fiduciary for the

8 will of the beneficiary.

9 THE COURT: Right.

10 MR. RABINOVITZ: That is exactly what has to

11 happen.

12 THE COURT: Okay.

13 MR. RABINOVITZ: No evidence of that here.

14 That's the point; right? No meeting of the minds.

15 Nothing that takes this out of the typical

16 auditor/auditee relationship.

17 THE COURT: Okay.

18 MR. RABINOVITZ: If I can quickly just

19 address Lowrence if --

20 THE COURT: Sure.

21 MR. RABINOVITZ: -- and Clark.

22 THE COURT: I guess, when you said that

23 earlier, I stopped you, because I want you to focus

24 on what --

25 MR. RABINOVITZ: Yeah. No, it's helpful.


155

1 THE COURT: If you tell me again that trust

2 and confidence doesn't cut it, I am just going to

3 say, I got it.

4 MR. RABINOVITZ: That's perfect.

5 THE COURT: Okay.

6 MR. RABINOVITZ: And you can throw things and

7 whatever else, yes.

8 THE COURT: Okay. So if you're going to

9 review --

10 MR. RABINOVITZ: I am happy to move on as

11 long as you want me to.

12 THE COURT: -- Lowrence to tell me that --


14 THE COURT: -- it doesn't say that --

15 MR. RABINOVITZ: I'm not.

16 THE COURT: -- I literally have it written

17 right here myself, so I got it.

18 MR. RABINOVITZ: I was going to back to

19 Lowrence for a separate one.

20 THE COURT: Okay. Then that's what I want to

21 hear.

22 MR. RABINOVITZ: And I think it's the final

23 point I want to make.

24 THE COURT: Okay.

25 MR. RABINOVITZ: Mr. Keglovits characterized


156

1 for you the facts of Lowrence and Clark by way of

2 trying to address an argument that PwC hasn't made.

3 THE COURT: Okay.

4 MR. RABINOVITZ: And the argument that he

5 believes PwC made is that fiduciary duties have to be

6 created by contract. First, Your Honor, that's not

7 my argument; but second, Lowrence and Clark were

8 totally different factual situations. In Lowrence,

9 the fiduciary relationship was created by statute.

10 So regardless of whether there was a contract or not

11 in Lowrence, the fiduciary relationship arose because

12 the statute bestowed certain obligations on the

13 Department of Veterans Affairs.


15 MR. RABINOVITZ: Not the case here.

16 Clark. The issue in Clark was that -- well,

17 one, the bank or the alleged fiduciary in that case

18 did make an argument that fiduciary relationships

19 could only be made by contract, and the Court did

20 address that and rejected it.

21 But, more importantly, the issue there the

22 Court held, was although you had a contract with the

23 trustee of the trust and you might not have been the

24 trustee's fiduciary or you might have, this was a

25 suit by a beneficiary of the trust who did not have a


157

1 contract with the bank, the financial adviser. So

2 the Court said, We don't care what your agreement

3 with the trustee is; this is a suit by the

4 beneficiary. And so you can't point to your contract

5 with the trustee and tell us that means you weren't a

6 fiduciary of the beneficiary. So not the case here.

7 So my point as to the contract is not that a

8 contract is necessary for the creation of a fiduciary

9 relationship, but that where there is a contract and

10 where the contract says, by mutual agreement of the

11 parties, this is our whole agreement, and where that

12 agreement then does not create a fiduciary

13 relationship, then, in that circumstance, none is

14 created.

15 I said that was going to be my last, but if I

16 could make one more point.

17 THE COURT: No. No.

18 MR. RABINOVITZ: That's good. I now know

19 you're joking.

20 THE COURT: You got my poker face down.

21 Okay. Go ahead.

22 MR. RABINOVITZ: Mr. Keglovits said twice

23 that accountants are no different than attorneys and

24 I think it's worth mentioning, yet again, that the

25 U.S. Supreme Court has expressly rejected that


158

1 argument.

2 In the Arthur Young case, there was an argument made,

3 Hey, there should be work product protections for

4 accountants, because they're exactly like lawyers,

5 and the Supreme Court in great detail explains that

6 is not true. Lawyers are advocates of their clients

7 and they have a private confidential relationship.

8 That is not like the Supreme Court said, what

9 auditors do for their clients; auditors have to be

10 independent.

11 So it's worth noting that that point came up

12 twice in Mr. Keglovits's presentation. It's directly

13 contrary to the United States Supreme Court.

14 THE COURT: Okay.

15 MR. RABINOVITZ: Thank you, Your Honor.

16 THE COURT: Any last words, Mr. Keglovits?

17 MR. KEGLOVITS: Well, if I might.

18 THE COURT: Sure.

19 MR. KEGLOVITS: I know you'll do it, but when

20 you go back to the summary judgment motion filed by

21 PwC, you'll see four facts.

22 The first is that the contract was signed;

23 the second is that Mr. Stallings and Greg Wallace

24 signed the contracts; the third is that the contracts

25 set out that they will perform audits in accordance


159

1 with GAAS and neither contract mentions the word

2 "fiduciary duty"; and the last is that the auditing

3 standards essentially are a per se rule that you

4 can't be a fiduciary.

5 The burden here on summary judgment is for

6 them to come forward to show there is no possible

7 factual dispute about trust, confidence, domination.

8 There is not a fact here for you to rest your

9 decision on with regard to that.

10 On the other hand, in our brief, I want to

11 point you to page -- I believe it's Page 16.

12 Actually, beginning over on Page 15 through 16. We

13 provide you a whole lot of factual information about

14 how trust and confidence was placed by the Board and

15 by the team members of the Board and others in PwC.

16 And if you look at the third bullet point on Page 16,

17 you'll see there is even some summary judgment

18 evidence from Mr. Colwell, who was the partner of

19 PwC, about the services that PwC provided in addition

20 to these audit services.

21 THE COURT: Where is that?

22 MR. KEGLOVITS: Third bullet point, Page 16.

23 THE COURT: Okay.

24 MR. KEGLOVITS: Tax advice, advice how to

25 interpret GAAS standards, drafting risk management


160

1 policy.

2 So the relationship was, in fact, broader --

3 based on this summary judgment, it's undisputed the

4 relationship was broader than simply an audit.

5 And so, weighing the summary judgment evidence, as I

6 know the Court will, you will look to see whether PwC

7 has met its burden to negate every possible inference

8 that could come from the facts in the record.

9 I want to go back just a moment to the

10 mention that was made of conflicting duties, and you

11 were provided again the per se rule that a fiduciary

12 cannot have conflicting duties. And so, I guess, we

13 would imagine in that world that when I am the

14 beneficiary of the trust, I can just go to my trustee

15 and tell my trustee, "Give me all the money in the

16 trust, regardless of the terms of the trust, because

17 you're my fiduciary; you can't have any conflicting

18 duties," or as the patient of a physician, I can go

19 to the physician and say, "I need a whole lot of

20 hydrocodone today. Give it to me, because you're my

21 fiduciary; you can't have any conflicting duties,"

22 and we can go on and on.

23 But it's just sort of ridiculous to say that

24 a fiduciary can't have conflicting duties. In those

25 cases, the fiduciary's duty to its beneficiary is to


161

1 follow the rules, whether it's the law about

2 prescribing medicine and the Hippocratic oath, or the

3 terms of the trust or, in this case, GAAP and GAAS,

4 and our fiduciary was obliged to follow GAAP and GAAS

5 because of the trust and confidence we placed in

6 them.


8 Mr. Rabinovitz, did you hear him talk about Page 16

9 of his brief? And I just want to address that bullet

10 point with you where he cites: In addition to

11 providing SemGroup's audit insurance services -- this

12 is what I was talking about --


14 THE COURT: -- PwC also provided tax

15 services --


17 THE COURT: -- conversations about

18 acquisitions and how to interpret standards, GAAP

19 standards, and assisted in drafting SemCanada's risk

20 management policy.

21 Can you address those facts?

22 MR. RABINOVITZ: Yes. Sure, Your Honor.

23 Let me start with this, none of that suggests

24 anything about domination or the substitution of the

25 will of PricewaterhouseCoopers for the will of


162

1 SemGroup, none of it. Not just that bullet point;

2 all of these bullet points, not a one. But,

3 secondly, those are not the services that are being

4 charged in this lawsuit.

5 So, in other words, in this lawsuit,

6 Plaintiff is criticizing the audit services that PwC

7 provided. So even if it were true -- and it is --

8 that PwC provided tax services, for instance, to

9 SemGroup, Plaintiff's claim is not that you provided

10 bad tax services, their claim is that you provided

11 bad audit services. And there is no rule that once

12 you're a fiduciary for one purpose, you're a

13 fiduciary for every purpose. That's not how it

14 works. Auditors often perform -- or accounting firms

15 often perform out of different divisions.

16 THE COURT: Yeah, that was my question.

17 MR. RABINOVITZ: Yeah.

18 THE COURT: Is this the same -- were those

19 services out of the same group, out of the same

20 audit, or were those other services, if you know?

21 MR. RABINOVITZ: I don't believe there is

22 evidence in the factual record about that on summary

23 judgment, but the answer is that tax services were

24 provided by other folks. Conversations about

25 acquisitions, I don't know what Mr. Colwell was


163

1 referring to, but auditors have to keep up on what

2 the company is doing so that when they audit the

3 financial statements, they can do that. So that's

4 not really a provision of any services at all.

5 That's just a conversation probably to get updated.

6 And then, finally, drafting a risk management

7 policy for, apparently, a Canadian subsidiary, I,

8 confess, I don't know, Your Honor, who specifically

9 within PricewaterhouseCoopers did that or even

10 whether it was PricewaterhouseCoopers Canada, which

11 is a separate auditing firm, a separate accounting

12 firm. But either way, those are not the services

13 that are at issue in this case.

14 Before I sit, Your Honor, and in closing,

15 Mr. Keglovits's closing statement to you was it's

16 ridiculous to say fiduciaries can't have conflicting

17 duties. That is precisely the statement made by the

18 Oklahoma Supreme Court in Showalter where it says a

19 fiduciary --


21 MR. RABINOVITZ: Showalter.

22 -- where the Oklahoma Supreme Court said a

23 fiduciary cannot be subject to conflicting duties.




164

1 THE COURT: Okay. We're going to get ready

2 to take a break. Just so everybody knows, the next

3 section that we're going to talk about is very

4 interesting, about whether the Plaintiffs cannot

5 prove professional negligence on derivatives trading

6 in the Westback trades made by Mr. Kivisto on behalf

7 of SemGroup. And I think when we're discussing that,

8 we're also going to be mixing in the argument about

9 the audit interference doctrine, which is the subject

10 of the other motion for summary judgment on the

11 defense that was alleged. I am thinking we can pile

12 those things in together.

13 But before we take a break, I'll go ahead and

14 make my rulings on the statute of limitations

15 argument and the fiduciary duty argument.

16 As to the summary judgment issue number two,

17 Plaintiff's claims regarding the 2005 audits being

18 barred by the statute of limitations, I am going to

19 overrule that and say that -- and the argument about

20 the pleading statute, I am going to overrule that

21 argument as well and note your exception.

22 In regards to the fiduciary duty claim, I am

23 going to sustain the motion for summary judgment in

24 regards to that, noting that I don't think there is

25 any other material facts that can put that type of


165

1 relationship at issue here, and that will be

2 sustained, noting everyone's exceptions to those

3 rulings.

4 We'll take a quick break. I'm going to say

5 ten minutes. And then we'll finish up the summary

6 judgment argument for today.

7 All right. We'll be on break.

8 (Recess taken.)

9 THE COURT: I believe we are on summary

10 judgment issue number four, which is entitled

11 "Derivatives Trading," and then summary judgment

12 issue number five, which I believe -- yes -- is

13 entitled "Westback." And under each one of those,

14 there is specific issues that are argued.

15 Number one: Under Oklahoma agency law, the

16 alleged conduct and knowledge of Kivisto regarding

17 SemGroup's derivative training is SemGroup's conduct

18 and knowledge. Plaintiff's trading-related claims

19 are barred because SemGroup did not rely on

20 PricewaterhouseCoopers with respect to this trading

21 disclosures, which ties into the fact that the

22 knowledge was imputed.

23 And then the Westback claims: SemGroup

24 management authorized and formalized the relationship

25 with the full knowledge of Kivisto's role. SemGroup


166

1 management was well aware of the Westback

2 relationship and SemGroup management closely tracked

3 the amount Westback owed SemGroup.

4 And, again: The knowledge and conduct of the

5 managers and employees regarding Westback was imputed

6 to the company. Plaintiff's Westback relationship

7 claims are barred because SemGroup did not rely on

8 Pricewaterhouse's audits to tell them about Westback

9 and then the in pari delicto doctrine bars

10 Plaintiff's claims for professional negligence and

11 breach of fiduciary duty.

12 That is a lot to discuss, so ta-da, you're

13 up.

14 MR. BALASSA: Thank you, Your Honor. The

15 challenge has been set before me.

16 May I make a proposal?

17 THE COURT: Yes, please.

18 MR. BALASSA: Your Honor, we filed separate

19 motions for summary judgment between number four

20 relating to the trading-related damages and, number

21 five, relating to the Westback-related damages.

22 And we did that for a reason: Differing factual

23 situations, circumstances, and there are some

24 differing legal principles obviously. They're

25 overlapping principles.


167

1 What I would propose to the Court is that we

2 take them one at a time, rather than the arguing both

3 overlapping, to present the trading issues first and

4 then once we've had argument on that to have the

5 argument on the Westback damages. The Westback

6 damages argument would be much shorter because we

7 would have already argued about some of the legal

8 issues.

9 THE COURT: I agree. That sounds fine.

10 And since it's getting late in the day, I am going to

11 interrupt you if I am in agreement with something,

12 and I'm just going to let you start -- and I have my

13 thoughts organized in a certain way, but I'm going to

14 let you start presenting and then I'll probably be

15 interrupting a little bit more to ask you questions

16 or focus on a point I have a question about, because

17 this is a lot.

18 Okay. Go ahead.

19 MR. BALASSA: Understood. Your Honor, may I

20 approach? I have some materials. It is two binders,

21 but these binders are the same for the Westback and

22 for the trading.

23 THE COURT: Okay.

24 MR. BALASSA: So I won't bring any more

25 binders.


168

1 THE COURT: That's good.

2 MR. BALASSA: And I do this time have a set

3 of the slides printed --

4 THE COURT: Okay.

5 MR. BALASSA: -- that are up on the screen.

6 THE COURT: All right. Thanks.

7 MR. BALASSA: For the Court's reference, one

8 binder is cases and the other binder is evidentiary

9 material. I believe all of the evidence that I am

10 going to present will be in the slides, but in case

11 the Court wanted to see the detail behind it, I

12 wanted to provide the actual documents as well.

13 THE COURT: Okay.

14 MR. BALASSA: Your Honor, with respect to

15 summary judgment motion number four, this motion

16 involves the application of black letter agency law

17 principles.

18 Tom Kivisto, one of SemGroup's founders, a

19 management committee member, and the company's CEO

20 was unquestionably responsible for all aspects of

21 derivatives trading at SemGroup. He was responsible

22 for the trading strategy, for designing it, for

23 implementing it, for overseeing it, for having it

24 executed.

25 Under general agency principles, Kivisto's


169

1 conduct and knowledge with respect to trading are

2 imputed to SemGroup. This is a matter of law.

3 The Plaintiff here can't say that SemGroup didn't

4 know about its own trading strategies and that it

5 needed the auditors, the outside financial statement

6 auditors, to tell SemGroup about its own trading

7 strategy. To put a finer point on it, Your Honor,

8 SemGroup can't sue PricewaterhouseCoopers for not

9 telling SemGroup information that SemGroup already

10 knew about its trading strategies. But that's

11 exactly what the Plaintiff is doing here.

12 We have on the screen -- you have before you

13 and it will shortly be on the screen, Paragraph 100

14 from --

15 Excuse me. That's my fault, Your Honor. I

16 apologize.

17 THE COURT: Oh, that's okay.

18 MR. BALASSA: We have on the screen now from

19 the Petition, a section heading, that the disclosure

20 of Kivisto's trading strategy was inaccurate,

21 misleading and incomplete. And Paragraph 100 says

22 the Kivisto's trading strategy and activities were

23 not fairly presented in the financial statements.

24 And if we go to the next slide from two

25 paragraphs later in the Complaint, Paragraph 102,


170

1 there is an assertion: The drastic increase in

2 derivative liabilities and corresponding decrease in

3 earnings, which were reported in the financial

4 statements, were caused by Kivisto adopting a trading

5 strategy, increasingly divorced from SemGroup's

6 physical inventory, and based on speculation.

7 And the allegation here is the financial statements

8 didn't disclose that the Kivisto strategy was

9 divorced from physical inventory and based on

10 speculation. In other words, the Plaintiff is

11 complaining that there wasn't appropriate disclosure

12 in its own financial statements about SemGroup's own

13 trading strategy.

14 The Plaintiff's trading expert, Carpenter, takes

15 that a step further. And what he says and he sites

16 to two bankers -- and this is at Page 23 of --

17 excuse me -- Paragraph 23 of his report -- he cites

18 to the deposition testimony of two bankers, Terry

19 Ronan, formerly at Bank of America, who said that if

20 Bank of America had known that SemGroup was engaged

21 in speculative trading, it would have exited the

22 SemGroup relationship. And then he cites to the

23 deposition of Robert Valbona who said something

24 similar: If Bank of America had just known that the

25 trading strategy involved the sale of options not


171

1 backed by physical inventory or other offsetting

2 positions, what the Plaintiff says is speculative

3 trading, the bank would have recommended to the other

4 lenders that they terminate their relationship.

5 So the Plaintiff's expert is saying that the banks

6 would have stopped the speculative trading by forcing

7 SemGroup into bankruptcy or forcing a change in the

8 trading strategy.

9 But the banks aren't suing PwC; SemGroup is,

10 or the trust standing in the shoes of SemGroup.

11 So for the purpose of the element of causation and

12 reliance, what matters is whether SemGroup was aware

13 of Tom Kivisto's speculative trading. As a matter of

14 basic agency law, SemGroup was aware and was

15 responsible for Kivisto's trading strategy.

16 Now, I want to be clear about the scope of

17 our motion, because the Plaintiff says, Well, we're

18 complaining about some other things. And what the

19 motion is directed at is Plaintiff's claim that the

20 financial statements contained inaccurate or

21 incomplete or insufficient disclosures about

22 SemGroup's derivatives trading.

23 PwC is entitled to summary judgment because

24 SemGroup knew what its trading strategies were and,

25 therefore, can't establish reliance or causation.


172

1 I would like to turn to the undisputed facts

2 here, and we really don't have to go beyond the

3 Petition, Paragraph 27, where the Plaintiff concedes

4 that Kivisto was solely responsible for devising and

5 directing the execution of SemGroup's trading

6 strategy prior to its bankruptcy in July 2008.

7 And that allegation is affirmed in deposition

8 testimony by management committee members; from

9 Andrew Ward, who said that Kivisto was going to lead

10 the development of the trading strategy and lead the

11 implementation; Jeff Wallace, another management

12 committee member, who said that one of the reasons

13 that his private equity firm invested in SemGroup was

14 because Kivisto was involved in trading, was the head

15 of trading; and Kevin Foxx, another management

16 committee member, and chief operating officer, who

17 said that Kivisto was the one who did the trading and

18 was supposed to implement the trading. The

19 Plaintiff's trading expert, Scott Jones, said the

20 same thing, that Kivisto was responsible for trading;

21 for designing the trading strategy; for implementing

22 it; for directing it. That's all from Scott Jones's

23 deposition, the Plaintiff's trading expert. And then

24 he even explained that from all of the thousands of

25 trades that he looked at, as far as he knows, Kivisto


173

1 authorized or actually executed all of the trades.

2 So with that -- with those undisputed facts

3 in mind, I'd like to turn to principles of agency.

4 And there is really two underlying principles of

5 agency law.

6 THE COURT: Uh-oh. I'm going to interrupt

7 your little speech here for a second, if you don't

8 mind.

9 MR. BALASSA: I don't at all.

10 THE COURT: Okay. Just because it's getting

11 late and you've done -- and I know, it's probably

12 frustrating, because you have a good flow and I'm not

13 trying to -- I'm not trying to -- on any of the

14 lawyers, I'm not trying to get you off-kilter by

15 interrupting and asking my own questions.

16 But from all of my longtime reading and thoughts

17 about this issue, personally I have kind of narrowed

18 it down to what I think I need to ask questions

19 about. And I am hoping I can explain that to you

20 quickly enough. But you can tell me if, No, Judge,

21 that's not right, or I don't get it. You all have

22 done a great job doing that, too, in a nice way.

23 I, literally, finally, just went to the

24 Oklahoma Jury Instructions and thought to myself,

25 what am I going to have to instruct in this case when


174

1 it comes to agency and partnership, and what are the

2 elements of the claims here, to focus in on what we

3 really might have a factual dispute about, and if we

4 do or don't, and whether summary judgment is

5 appropriate.

6 I looked at 6.7, 6.2 and 7.7.

7 It's very interesting. 6.7 says: An

8 employee is acting within the scope of his employment

9 if he is ... and it says what that can be; okay?

10 So that will tell the jury and us what the law is in

11 Oklahoma about what is acting within the scope of

12 your employment; okay?

13 Then 6.2 says: An employee is acting outside

14 the scope of his employment when he... and it defines

15 what is outside the scope of employment; okay?

16 Your huge argument here is the fact that, number

17 one, it's a corporation and their officers act on

18 behalf of ... and then the knowledge is imputed to

19 the corporation just for that fact; or the employee

20 itself is acting ... This is 7.7, where the jury can

21 be instructed -- and I'll just read it like I would

22 have written it for this case: Plaintiff SemGroup --

23 or we would have said, Bettina Whyte, however we're

24 going to do that -- is a corporation and can only act

25 through its officers and employees. Any act or


175

1 omission of an officer or employee while acting

2 within the scope of his employment is an act or

3 omission of the Plaintiff SemGroup; okay? And you're

4 saying: Oh, yeah, that's totally what's going on

5 here; okay?

6 So in my thoughts about this, and in going

7 back and forth, I really think, factually, the big -

8 and this is where we need to figure out is there a

9 dispute or is there not -- was Mr. Kivisto in each

10 scenario, either the derivative-trading scenario or

11 the Westback-trading scenario, acting within the

12 scope of his employment. Because if he was or wasn't

13 then goes on to determine whether the knowledge can

14 be imputed to the company. And then if it was

15 imputed, then they could not have relied on the audit

16 because they already knew it; right?

17 MR. BALASSA: (Nods head.)

18 THE COURT: Okay. So if you don't mind, I

19 think we just need to focus -- unless -- and I could

20 have missed something -- that's completely

21 possible -- and we're not even yet -- I'm not talking

22 about the in pari delicto doctrine yet. I'm just

23 talking about the agency principles of imputing

24 knowledge of Kivisto to the company and each of the

25 relationships and what our law says has to be


176

1 established; what is acting within the scope and what

2 isn't within the scope. Because if there is a lot of

3 facts flying all over the place that the jury's going

4 to have to determine this relationship, this is not a

5 good summary judgment issue. If there are facts that

6 show that they can't be any other way, then I think

7 this is a good issue for us to talk about for summary

8 judgment.

9 So my questions are solely -- my little "ask

10 PricewaterhouseCoopers' list" literally entails

11 questions about: Aren't there arguments that are

12 laid out on the table by the Plaintiffs that cite all

13 of the evidence under the Westback and trading claims

14 where they are going to come in and say that the

15 speculative -- they don't even know if the trades are

16 speculative or unspeculative; they don't know that

17 there was -- they're going to argue there is no

18 difference anyway; and they don't know why you're

19 separating them out, at least I read that in their

20 briefs as well.

21 And then it comes down to -- and the

22 difference between -- and this is why -- and I'm just

23 going through my thoughts with you for a second so

24 you can know where I'm focusing.

25 I think it's very interesting that you're


177

1 separating them out, and I think I know why. Not

2 only do you think they separate them out in the

3 Petition, but the law is very interesting when it

4 comes to what is outside the scope of employment, and

5 the Westback relationship seems to be an area where

6 your argument is more strong on the facts that it was

7 more for his own personal gain; outside the scope of

8 his authority; not within the knowledge of them, or

9 within their knowledge; it was for an independent

10 purpose outside of the business; he wasn't making any

11 money for SemGroup, what could be the argument; the

12 derivatives trading.

13 So those are -- I mean, are those -- aren't

14 there a number of facts that go into whether or not

15 Kivisto was doing it for his personal gain? The

16 derivatives were only giving him bonuses, like any

17 normal businessman would get, whereas the Westback

18 trades were for his personal gain to buy trips or

19 donate stuff to charity? Isn't there tons of

20 evidence out there that there are trades -- how --

21 trades are outside this normal business, how would

22 derivatives or Westback trades be reasonably included

23 in the purpose of Kivisto's job?

24 I think that -- I need you to tell me how

25 there is not facts out there that don't create an


178

1 argument that in the derivatives section, he was

2 within the scope or he was not within the scope, and

3 in Westback he was in the scope or he was not in the

4 scope. I am not finding that you are pointing to any

5 facts in your brief that can't be more challenged by

6 the response of the Plaintiff with their facts to

7 show that it is a factual-phrased question for the

8 jury.

9 So if you can focus on the scope argument and

10 tell me what facts you think are there that can't be

11 disputed that establish that you should get summary

12 judgment on Westback and derivatives within the scope

13 of employment, unless you think there is something

14 else I need to talk about.

15 MR. BALASSA: I think that's an appropriate

16 place to focus, Judge.

17 THE COURT: Great.

18 MR. BALASSA: I think you hit the nail on the

19 head, and I would like to start with trading.

20 The derivatives trading here the Plaintiff claims

21 should have been disclosed differently, in the

22 financial statements. That's what we're talking

23 about, derivatives trading at SemGroup. There's a

24 separate part that deals with derivatives trading for

25 Westback and I want to address that separately.


179

1 THE COURT: Right.

2 MR. BALASSA: Your Honor's correctly

3 identified some of the differences between the two.

4 So with respect to the trading that was done on

5 SemGroup's account for SemGroup, there is no dispute

6 from anything the Plaintiff has put up that Kivisto

7 was the one at SemGroup who was charged with

8 responsibility for determining the company's

9 derivatives trading strategy. In other words, what

10 the Plaintiff says should have been disclosed in the

11 financial statements is what the Plaintiff says in

12 the Petition and the other witnesses testify that

13 Kivisto was responsible for, devising and directing

14 the execution of the trading strategy. Andrew Ward,

15 management committee member, that he is responsible

16 for developing that strategy and implementing it;

17 Jeff Wallace, that they came to SemGroup because

18 Kivisto was in charge of the trading strategy; Kevin

19 Foxx, that he was the only one -- Kivisto was the

20 only one doing the trading; Brent Cooper, Treasurer,

21 that Kivisto was expected to set and direct the

22 trading strategy; and then the Plaintiff's expert

23 again, Scott Jones, that he understood Kivisto was

24 the one responsible for the derivatives trading --

25 for designing and for implementing the derivatives


180

1 trading strategy. And he was the one in the last

2 quote at the bottom,

3 Question: As far as you know, was the

4 derivative trading that's the subject of your

5 opinions in this case authorized by Tom Kivisto?

6 Answer: Yes. Or actually executed by

7 Kivisto.

8 THE COURT: Let me ask something real quick.

9 Plaintiffs, I'm going to be totally out of the box

10 when we have our arguments today. Tell me -- I was

11 going to ask you anyway -- are you going to argue

12 that Tom Kivisto is not an officer or an employee of

13 SemGroup?

14 MR. TIMMONS: No, Your Honor.

15 THE COURT: Okay. Are you going to argue

16 that he was not in charge of your derivatives

17 trading?

18 MR. TIMMONS: No, Your Honor, he was in

19 charge of the derivatives trading.

20 THE COURT: Okay.

21 MR. TIMMONS: No dispute about that.

22 THE COURT: So there aren't any disputes

23 about -- what these people are saying is yes, he was

24 in charge -- it was just then how he executed those

25 and made those decisions; correct?


181

1 MR. TIMMONS: No, Your Honor.

2 THE COURT: No?

3 MR. TIMMONS: There's a big disconnect here.

4 THE COURT: Okay.

5 MR. TIMMONS: I'm happy to address it, if

6 you'd like.

7 THE COURT: No, no, no. That's okay. That's

8 where I got -- I did have those two questions to see

9 if we all were in agreement on those two things:

10 That he was an employee and that his contract -- and

11 I am being very general -- that he was the trading

12 guy.

13 MR. TIMMONS: Yes, Your Honor.

14 THE COURT: Okay. Got it.

15 Okay. We got that.

16 MR. BALASSA: So those facts, they're not

17 disputed.


19 MR. BALASSA: Then I think maybe where Your

20 Honor was going next is, was the type of trading that

21 he did, did that comport with the company's policy.


23 MR. BALASSA: Was he -- because he was,

24 according to the Plaintiff, violating the company's

25 policy, does that mean that his conduct doesn't get


182

1 imputed, that he's acting outside the scope of his

2 authority, and we have Oklahoma case law that

3 addresses that issue squarely. And if Your Honor

4 would turn to the cases binder, it's about the fifth

5 case in, the cases are organized alphabetically.

6 THE COURT: Okay.

7 MR. BALASSA: The Dill case.

8 THE COURT: Oh, yes. Uh-huh. If you're

9 doing something illegal, it still gets imputed to you

10 conversation?

11 MR. BALASSA: That's right, Judge.

12 Exactly.

13 So as Your Honor is aware, in the Dill case,

14 the Plaintiff was suing City officials for wrongful

15 conduct. And what happened there is certain City

16 officials, who were responsible, according to the

17 Court, for protecting the City from lawsuits, they

18 went a little outside the norm in trying to protect

19 the City from a lawsuit.

20 And what they did, when they heard that a

21 policeman was going to bring a lawsuit, what they

22 went around and did, they defamed him, they slandered

23 him. They said to people that he was corrupt.

24 They said to people that he had furnished minors with

25 alcohol. They said to people that he had assaulted a


183

1 minor in his police car.

2 And the question before the Appellate Court,

3 the Civil Court of Appeals, was whether this conduct

4 by the City officials gets imputed to the City,

5 because obviously the City didn't authorize the

6 individuals to go and do these -- engage in this

7 extreme and outrageous behavior, and the Court

8 explains -- in fact, the Court does a few things; the

9 Court walks through the history of agency law and

10 imputation in Oklahoma.

11 And the Court provides an explanation and

12 ultimately concludes that the City official's conduct

13 does get imputed, because they were the ones

14 responsible for defending the City against lawsuits.

15 And the fact that they engaged in illegal conduct

16 that the City might have not approved of, they are

17 still acting within the scope of their authority

18 within the scope of their employment. They may have

19 executed their responsibilities in an improper way,

20 but they were the agents that the City had chosen to

21 carry out the responsibility of protection against

22 lawsuits. And so their conduct still gets imputed,

23 even if the City doesn't approve of it.

24 And so, we see -- for instance, on Page 6 of

25 7, this is in a note to the Court, quoting another


184

1 Oklahoma case, Oklahoma Supreme Court case, says:

2 The principal is held liable to third persons in a

3 civil suit for the frauds, deceits, concealments,

4 misrepresentations, torts, negligences and other

5 malfeasances of his agent, in the course of his

6 employment, although the principal did not authorize

7 or justify or participate in or, indeed, know of such

8 misconduct -- and here is the key language -- or even

9 if he -- the principal -- forbade or disapproved of

10 it, the conduct still gets imputed. If the person is

11 charged with responsibility for a subject, for a

12 task, the principal's on the hook, however it is,

13 that the agent carries out that responsibility, even

14 if it's in violation of the corporate policy.

15 And we see, since Your Honor has raised the

16 question, I do want to point to another paragraph in

17 the same case, and this is, again, Dill, reviewing

18 Oklahoma authority on point.

19 Paragraph 20 of the case is addressing a

20 railroad company employee and the Court there says

21 that a railroad company is responsible in damages to

22 a trespasser for torts committed upon him by a

23 servant, who in the commission of the tort, is acting

24 in his line of -- in the line of his employment and

25 within the scope of his authority. That seems pretty


185

1 straightforward.

2 So, for instance, you have someone who's

3 responsible for watching the railyard, but then that

4 person uses excessive force and maybe even kills

5 someone who happens on the yard. And the Court goes

6 on to draw a distinction here and says: Not within

7 the scope of his authority as applied to the

8 commission of the tort for no authority for such

9 commission could be conferred.

10 So the Court there is saying you're not looking to

11 ask whether the individual was authorized in the

12 particular way that he or she carried out their

13 responsibilities, and here in the commission of a

14 tort or in our case, arguably, according to

15 Plaintiff, in violation of corporate policy, but

16 rather the question is whether the conduct is within

17 the scope of his authority to rightfully do the

18 particular thing which he did do in a wrongful

19 manner.

20 So there the railroad employee responsible

21 for watching the railyard, he is the agent the

22 railroad has chosen to do this task. He may perform

23 it in a wrongful way. The conduct, the illegal

24 beating, still gets imputed to the principal.

25 And it's with that legal principle in mind,


186

1 Your Honor, that we can, I think, dispose of

2 Plaintiff's suggestion that Mr. Kivisto, his conduct

3 in trading, the subject area for which he wasn't just

4 a participant, he was the master of SemGroup's

5 trading from day one through the bankruptcy, that we

6 can dispose of the suggestion that, because he

7 engaged in trading activity, that violated corporate

8 policy that that shouldn't be imputed? No. He is

9 the one responsible for trading and, like in the

10 railyard instance, he is the one they chose to do the

11 trading. And if he does it in a way that's wrongful,

12 it's still imputed to the principal because we hold

13 principals responsible for their choice of agents.

14 And that is what -- that's what the law is in

15 Oklahoma and it's the law in every jurisdiction,

16 Your Honor.

17 The reason that I am pointing the Court to

18 other jurisdictions is to underscore that this is not

19 a novel concept. This is a concept -- this is the

20 law of the land as much in Oklahoma as in anywhere

21 else.

22 May I move on or does Your Honor have? --

23 THE COURT: No, go ahead.

24 MR. BALASSA: -- a question on that?

25 So if I may just --


187

1 THE COURT: Yeah. Take your time.

2 MR. BALASSA: -- make sure I have addressed

3 Your Honor's point.

4 As I was saying, there is no dispute. I

5 think Plaintiff's counsel has indicated that Kivisto

6 has responsibility for trading at SemGroup. And as a

7 consequence, under these essential principles of

8 agency law, including the OUJI instructions that

9 Your Honor has pointed to, that provide in

10 sections -- in number 7.7 that: If a plaintiff is a

11 corporation and can only act through its officers and

12 employees, any act or omission of an officer or an

13 employee while acting within the scope of his or her

14 employment is an act or omission of the Plaintiff.

15 Kivisto was acting within the scope of his authority

16 as the master of trading. They can take issue with

17 the way he did it, but he is still the agent they

18 chose to do it, and the law in Oklahoma and elsewhere

19 is that the principal is responsible.

20 And, you know, I could actually give a brief

21 example that I think helps to illustrate. If you

22 have a truck driver, who is doing his rounds, he's

23 doing deliveries, and he is texting and he has an

24 accident, the company's responsible. He is acting

25 within the course of his employment and the company's


188

1 responsible, even if they have a policy against

2 texting.

3 Your Honor, the imputation of Kivisto's

4 trading conduct and his knowledge about trading to

5 SemGroup defeats the elements that Plaintiff must

6 establish here, reliance and causation. SemGroup

7 could not have relied on some allegedly incomplete

8 disclosure about its trading activity in its audited

9 financial statements because SemGroup knew through

10 imputation about the trading activity.

11 Now, Plaintiff makes some arguments in

12 response and I'll address some of them. I would be

13 happy to address any ones that I leave off in

14 rebuttal.

15 THE COURT: What I would like to do is let

16 them offer their argument and then you can stand up

17 and rebut them.

18 MR. BALASSA: I'll do that, Judge.

19 THE COURT: Okay. Great. Thank you.

20 All right. Mr. Timmons, you're giving

21 Keglovits a break, huh?

22 MR. TIMMONS: He's been working hard, Your

23 Honor.

24 THE COURT: Yes.

25 MR. TIMMONS: I will try to address the


189

1 imputation arguments as they relate to the trading,

2 but there is, obviously, some overlap here with

3 respect to the Westback claim as well.

4 But before we even go there, I want to point

5 out, I mentioned to Your Honor when you asked me some

6 questions, I said there is a big disconnect here.

7 The fundamental disconnect is this is not a case

8 where we are suing PwC as a joint tortfeasor in an

9 intentional tort for fraud, for example; we are not

10 suing SemGroup's former managers and PwC for

11 mismanaging the trading. What we are suing PwC for

12 here is auditing malpractice. The focus of our claim

13 is on the way financial information and financial

14 activity that took place at the company was reported

15 in the financial statements.

16 And to begin, I want to start off with the

17 Stroud case. That's an Oklahoma Supreme Court case.

18 We think it's a seminal case for purposes of this

19 case. And in Stroud, the Court explained the role of

20 an auditor in the context of a malpractice case.

21 The Court said: When a certified public accounting

22 firm is engaged for audit purposes, it is employed to

23 discover inadvertent errors in its client's

24 bookkeeping systems and, further, to protect the

25 client from its own employees' failure to find errors


190

1 in the company's books and accounting system.

2 So Stroud takes as a given, there is going to

3 be some potential negligence on the part of a

4 company's employee. And if that were the end of the

5 inquiry, you could almost never find an auditor

6 liable for malpractice. The focus, as I said, Your

7 Honor, in this case is on the way that the

8 information is reported in the financial statements.

9 And so when we're talking about the knowledge

10 that gets imputed to the company, I think it's

11 important to begin by asking the question: What is

12 the knowledge in this case that is allegedly going to

13 be imputed to the company in such a way as to excuse

14 the auditor from performing their duties.

15 Now, the facts of Stroud are also

16 instructive. If you read the Stroud opinion, you'll

17 note, as the Court did there, that it was the

18 employee -- it was the company's own employee that

19 had discovered a potential error in the financial

20 reporting process and brought it to the attention of

21 the auditor in that case, and the auditor chose to

22 ignore it and issued its audited opinion anyway.

23 Now, if you could simply impute the knowledge

24 of a company's employee about the underlying

25 transaction to the company in such a way as to excuse


191

1 a malpractice claim, first of all, Stroud would have

2 been decided wrongly, based on the facts, and you

3 could never find an auditor liable for malpractice.

4 So what is the knowledge that PwC is alleging

5 should be imputed to SemGroup? They simply say:

6 Well, it's knowledge that people at SemGroup and

7 Mr. Kivisto, in particular, had that the trading had

8 elements of it that were speculative, that the

9 trading was speculative. But that's not knowledge --

10 that's not the same thing as the knowledge of how

11 that kind of trading activity should be reported in

12 the financial statements under GAAP.

13 Now, GAAP is a set -- GAAP stands for, as we

14 went over before, last week, generally-accepted

15 accounting principles. GAAP is a set of principles

16 and standards that govern the way information is

17 supposed to be presented and characterized in a

18 company's financial statements.

19 Is the money, for example, that a company

20 receives revenue? When is that revenue supposed to

21 be recognized? Is the cash from a transaction

22 supposed to be recorded as cash from operations or

23 cash from financing? Is something considered an

24 asset? If so, when does it become an asset and how

25 should it be valued?


192

1 These sound like simple questions, but there

2 are entire chapters of college-level accounting and

3 auditing textbooks that are devoted to these

4 questions and the answers are not always very simple.

5 They require lots of skill and knowledge, years of

6 education and training, in order to determine under

7 GAAP how you classify certain transactions, and that

8 was certainly no different here in the case of

9 SemGroup.

10 GAAS, as you know, stands for

11 generally-accepted auditing standards, and that's

12 another set of standards designed to help ensure that

13 financial statements comply with GAAP.

14 Our central allegations in this case, Your

15 Honor, is that PwC didn't comply with GAAS or GAAP in

16 conducting the audit. So mere knowledge by a

17 SemGroup employee that the trading transactions were

18 speculative or involved the sale of naked options

19 does not equate to knowledge about how those

20 transactions should have been reported in SemGroup's

21 financial statements. And if I could just give one

22 example of how this plays out.

23 THE COURT: Can I ask you if I understand

24 what you're talking about?

25 MR. TIMMONS: Yes.


193

1 THE COURT: Okay. I think what you are

2 trying to tell me is that there is other things

3 outside of the trading activity that you can show

4 that the auditors did not do in order to follow

5 GAAP rules and, therefore, still cause the damages

6 that happened outside of the trading activity; is

7 that what you're talking about?

8 MR. TIMMONS: Sort of.

9 THE COURT: Okay.

10 MR. TIMMONS: Let me try to explain.

11 THE COURT: Because you're losing me a

12 little.

13 MR. TIMMONS: Okay. Let me explain by an

14 example.

15 When we're talking about speculative trading

16 transactions, that's describing certain economic

17 activity. But it doesn't tell you anything at all

18 about, well, how should that information be reported

19 in the company's financial statements; where should

20 it be reported in the company's financial statements;

21 does it go on the balance sheet; does it go on the

22 income statement. There are three components to the

23 financial statements and there are lots of rules

24 under GAAP about where certain information should go,

25 how it should be classified, and so forth.


194

1 So one aspect of the so-called speculative

2 trading activity that took place at SemGroup was --

3 as alleged and as explained more fully in our

4 expert's report -- had the effect of, essentially,

5 financing operations. Basically when SemGroup would

6 sell an option, it would sell under this so-called

7 definition of speculative trading, would agree to

8 sell oil in the future that it didn't have and didn't

9 expect to have.

10 So that's why they're called so-called naked

11 options. There wasn't any physical oil really behind

12 it to back up those transactions.

13 When SemGroup would sell those options, it

14 would receive a premium, cash premium, like when an

15 insurance company sells an insurance policy. Well,

16 SemGroup oftentimes was doing that, at least in the

17 fall of 2007, to generate additional cash because it

18 was strapped for cash.

19 Under the GAAP accounting rules, those kinds

20 of transactions have what are known as an element of

21 financing and, as such, are required to be classified

22 in the financial statements in a different area.

23 If we could just pull up graphic two.

24 I'll show you, for example, this is the -- on

25 the left-hand side is the income statement -- I'm


195

1 sorry -- the cash flow statement for SemGroup for

2 2007 as it was reported. And if SemGroup had

3 reported these speculative transactions that had an

4 element of financing in the way that they should have

5 under GAAP, they should have explained that a big

6 portion of the revenue that they were recording of

7 the cash they were getting was coming from financing

8 activities, not cash.

9 So if you can see on the right-hand side, the

10 difference. SemGroup actually reported that it lost

11 688 million dollars from operating activities in

12 2007. But if they had done this properly, they would

13 have reported that they had lost 1.8 billion dollars

14 in their operating activities.

15 And if you go down below, a little bit

16 further in the cash flow statement, you'll see

17 another line item that talks about the cash that they

18 obtained from financing activities; if they had gone

19 out and borrowed money, for example, that cash shows

20 up here. Well, if they are selling options to

21 generate financing, that money shows up here and it's

22 a huge difference. And what it would have told

23 investors and readers of the financial statements,

24 the board of SemGroup, is that: We are hemorrhaging

25 money. We are hemorrhaging cash from operations, if


196

1 this had been disclosed properly.

2 Now, the fact that some employee at SemGroup

3 knew they were selling speculative -- or naked

4 options, that they were engaged in speculative

5 trading, doesn't say anything at all about how to

6 report that information in the financial statements,

7 and that's what we're suing PwC for.

8 Let me move on.

9 So that's the initial disconnect, Your Honor,

10 that I was pointing out.

11 The second point I wanted to make is that

12 this is a factual issue. There is no evidence that

13 SemGroup actually knew or that Mr. Kivisto actually

14 knew he was selling naked options, at least not on

15 the scale that he was that's been alleged.


17 MR. TIMMONS: In order to understand -- this

18 is complicated stuff, and in order to understand that

19 the options were, in fact, naked and were speculative

20 in nature, SemGroup would have been required to track

21 certain risks associated with its trading portfolio,

22 one of which is known as volatility, the risk

23 associated with changes and fluctuations in the

24 marketplace. SemGroup didn't do that. There is no

25 evidence in the record that SemGroup did that, at


197

1 least not until very close in time to the bankruptcy.

2 PwC's own trading expert has admitted in his

3 deposition that SemGroup did not track volatility.

4 Do we have that slide? I think it's No. 4.

5 This was put to Dr. Mackay, a trading expert:

6 Question: During that period, SemGroup

7 wasn't tracking volatility, was it?

8 Answer: SemGroup, I don't believe, really

9 tracked the vega or volatility until well into 2008.

10 Well, if SemGroup wasn't tracking that

11 information, there is no way they could have known --

12 anybody at SemGroup could have known the full extent

13 of the nature of this so-called speculative trading

14 activity. Certainly Kivisto couldn't have known it,

15 nobody could have known it at SemGroup if they

16 weren't tracking it.

17 In addition to that, SemGroup's traders were

18 all deposed that worked for Mr. Kivisto. Obviously,

19 Mr. Kivisto wasn't deposed in this case, because he

20 indicated he was going to assert his Fifth Amendment

21 rights. The other traders who worked beneath him

22 were deposed. They all said they were executing,

23 carrying out his trading strategies, and they all

24 believed that they were not engaged in speculative

25 trading.


198

1 Mr. Cowen was deposed by both PwC and by us.

2 Mr. Cowen was one of the traders that worked

3 underneath Mr. Kivisto. And here Mr. Balassa asks

4 him the question:

5 In the 2007 through mid 2008 time period,

6 were you engaged in what you viewed as speculative

7 trading?

8 Answer: None of the activities that we

9 pursued we viewed as speculative trading.

10 Now, Mr. Kivisto, as I say, wasn't deposed in

11 this case, but if he were deposed, I would guarantee

12 you that he would say the exact same thing, they did

13 not believe that what they were doing was speculative

14 in nature.

15 More importantly, SemGroup's outside board

16 members, the folks that controlled two-thirds of the

17 SemGroup board -- these are sophisticated

18 investors -- they did not believe SemGroup was

19 engaged in speculative trading.

20 Let's just go to graphic No. 7.

21 This is a deposition of Andrew Ward, who was

22 one of the outside investors, who sat on the board of

23 directors -- it was called management committee, but

24 it functioned as the board of directors -- for

25 SemGroup and he's a sophisticated financial investor.


199

1 Question: Mr. Ward, if you had been informed

2 about -- strike that. If you had learned at some

3 point in time, while you were serving as a member of

4 the board of directors, that SemGroup engaged in the

5 sale of naked options, for example, is that something

6 you would have taken an action to address?

7 Answer: I believe so. It was my

8 understanding the company did not have the ability to

9 write naked options.

10 So there is -- this is inherently a factual

11 issue.

12 I would just point out as well, virtually

13 every single PwC auditor that was deposed in this

14 case that was asked about speculative trading said:

15 I don't know what you mean. That means --

16 speculative trading, that means a lot of different

17 things to a lot of different people. It's very hard

18 to define. And here PwC is standing up in court

19 saying everybody knew what speculative trading was at

20 SemGroup and everybody knew that they were doing it.

21 The law in Oklahoma is quite clear and the

22 jury instructions that Your Honor cited come from the

23 law, that agency and the scope thereof are oftentimes

24 questions of fact that are to be determined by a

25 jury.


200

1 In this case, it's undisputed that the

2 trading activity violated SemGroup's risk management

3 policy. Again, PwC's own trading expert has admitted

4 that. By definition, that's going to be adverse to

5 the company's interest. The company's interests are

6 expressed in a policy and here the trading activity

7 was adverse to that policy.

8 The company also had debt covenants with its

9 lenders, you know, because we've talked about that,

10 that came up last week in the context of the Daubert

11 hearings. These bond covenants specifically

12 prohibited the kind of trading activity that SemGroup

13 could do and there is no question about the fact that

14 the so-called speculative trading was in violation of

15 those bond covenants. It was unknown and

16 unauthorized to two-thirds of the outside board

17 members. Let me state that better: It was unknown

18 and unauthorized to the folks that held two-thirds of

19 the seats of the outside -- of the SemGroup board.

20 There is evidence that will be presented that

21 Mr. Kivisto -- Mr. Kivisto's bonus was heavily

22 influenced by this kind of trading activity and he

23 had an incentive to act contrary to the interest of

24 his principal in this regard, Your Honor.

25 Your Honor, this kind of trading activity was


201

1 so far outside the scope of the business that

2 SemGroup was supposed to be in, that it can't be that

3 Mr. Kivisto was acting within the scope of his

4 agency.

5 While Mr. Kivisto certainly was in charge of

6 trading at SemGroup, the Board at SemGroup had

7 ultimate responsibility. The Board was the ultimate

8 representative of the agent here and the Board didn't

9 know that this was what Mr. Kivisto was doing.

10 So we think there are more than enough facts

11 for a reasonable juror to conclude that Mr. Kivisto

12 wasn't acting within the scope and course of his

13 employment.

14 More importantly, back to my first point,

15 even if -- even if Mr. Kivisto's knowledge about

16 speculative trading is imputed to the company, that

17 doesn't say anything at all about how this

18 information should have been reported in the

19 company's financial statements under GAAP, which is

20 what this case is all about.

21 I have some other arguments related to the

22 reliance part of this in some of the things that

23 counsel was saying, but it sort of makes sense,

24 from my point of view, to focus on imputation issues

25 first with respect to the trading and Westback before


202

1 we get into the question of whether these third

2 parties could be the ones who relied upon PwC's audit

3 work.

4 THE COURT: Sure.

5 All right. Mr. Balassa, do you have anything

6 really specific to argue? Because, I mean, we could

7 probably be here for another whole day just on these

8 two issues, so --

9 MR. BALASSA: Your Honor --

10 THE COURT: I asked him to tell me what

11 factually could come into play and I think he did

12 that. Do you have anything that you need to say

13 where that isn't factually in play?

14 MR. BALASSA: Your Honor, there is a lot that

15 he said that's mistaken and there is a lot he said

16 that's legally irrelevant. The standard, of course,

17 is whether disputed issues of material fact, so the

18 question is which facts are material.


20 MR. BALASSA: I apologize. The issue here is

21 whether there are disputed issues of material fact

22 and the Plaintiff's position about what the legal

23 standard is determines whether facts are material or

24 not and we disagree about that and I would like to

25 have an opportunity to address that.


203

1 THE COURT: Sure.

2 MR. BALASSA: If I could start with the

3 Plaintiff's recitation about what they say that GAAP

4 required and a discussion about an argument that the

5 company didn't necessarily know what GAAP required

6 and that that's something the auditors require.

7 But I agree with Mr. Timmons on one point, he said

8 that there is a disconnect here and I agree there is

9 a disconnect, but I submit the disconnect is on the

10 Plaintiff's side.

11 You see, the argument they're making, they're

12 mixing issues. The argument they're making about

13 GAAP, that's an issue about a dispute about

14 liability: Did PricewaterhouseCoopers comply with

15 GAAS in terms of opining on the financial statements

16 that Plaintiff says here didn't comply with GAAP.

17 That's a liability question; that's not what we're

18 talking about here. The argument here about

19 imputation goes to causation. It goes to causation

20 and reliance.

21 And so the point is that, even if we were to

22 assume for sake of argument, that GAAP requires

23 disclosure of the details of trading activity and

24 that those details weren't disclosed in the financial

25 statements, or weren't disclosed in a way that some


204

1 people understood them, the point is that the

2 Plaintiff here, the company, can't sue PwC for that.

3 They can't say they relied on the financial

4 statements to tell them what their trading activity

5 was. The Plaintiff's causation theory, the damage

6 theory that we're disputing, that we're attacking in

7 this motion, is that there should have been some more

8 disclosures about speculative trading in the

9 financial statements.

10 The passages that we saw from the Plaintiff's

11 damages expert about how people didn't understand

12 that SemGroup was engaged in speculate trading, well,

13 who did understand that? Under the law, Kivisto

14 understood it and, as a consequence, SemGroup

15 understood it and, as a consequence, SemGroup can't

16 recover from PricewaterhouseCoopers for not telling

17 it, regardless of what GAAP requires or not and what

18 GAAS requires or not. They can't recover as a matter

19 of reliance and causation from PricewaterhouseCoopers

20 on the theory that PwC didn't tell SemGroup about the

21 trading because Kivisto was doing the trading.

22 That's point number one, Judge.

23 Point number two. And point number two

24 Plaintiff's counsel says --

25 Can we pull up the slides again? Thank you.


205

1 -- that Kivisto didn't know that his trading

2 strategy was speculative. And the record evidence,

3 that's just argument, Judge, that's not evidence,

4 them saying -- in fact, I think what Mr. Timmons said

5 is: Judge, I predict that if Mr. Kivisto were to

6 testify, he would tell you he didn't know it was

7 speculative. The Plaintiff's assertion about what

8 someone who hasn't testified might say, that's not

9 evidence. We're not at the stage of supposing what

10 witnesses could say. We're seven months past the

11 close of discovery and it's time for them to put up

12 evidence, as they have been, to oppose our evidence

13 that Kivisto knew what he was doing in trading.

14 And so what is the evidence as opposed to the

15 argument about Kivisto's understanding of trading

16 activity? Okay. We've got testimony from the chief

17 operating officer, who founded the company with

18 Mr. Kivisto, and he said that Kivisto was somewhat of

19 a legend as a trader when SemGroup was founded.

20 He's an expert in trading. You have him saying that

21 Kivisto was recruited for this trading knowledge.

22 I've already mentioned the private equity investor

23 who says they invested tens of millions of dollars

24 because it was Tom Kivisto, golden boy, who was in

25 charge of trading at SemGroup.


206

1 And then, Your Honor, we have the Plaintiff's

2 own trading expert. What did he say in deposition?

3 He was asked by me: Do you have an opinion about

4 whether Mr. Kivisto intended to -- intended for

5 SemGroup's trading book to be naked on a net

6 portfolio basis? So I'm asking him here about

7 SemGroup's trading book.

8 And his answer is: Once, again, if you -- if

9 you adopt that strategy and you tell the traders

10 you've got to execute profitable trades or at least

11 costless trades, at some point, you're going to end

12 up with naked options. What the Plaintiff says is

13 speculative.

14 Now, he is a sophisticated trader; I would

15 have to believe he knew the risk. Those aren't my

16 words; those are the words of the Plaintiff's trading

17 expert, who analyzed the trading activity and trading

18 record in this case.

19 Next bullet. Another question.

20 Question: Do you have an opinion one way or

21 another as to whether those involved in trading at

22 SemGroup put on positions intentionally that resulted

23 in SemGroup -- these aren't the Westback trades --

24 but that resulted in SemGroup having naked options on

25 a net portfolio basis?


207

1 Answer: Well, the answer -- the answer to my

2 question -- that particular question, as I think

3 about it, would be yes, because they certainly

4 engaged in putting on options that you know were not

5 tied to physicals and they knew that's what they were

6 doing.

7 The Plaintiff's argument, Your Honor, that

8 Kivisto didn't know what he was doing, he didn't know

9 the trading was speculative, that is speculation.

10 What we have presented the Court with is record

11 evidence, and on summary judgment record evidence

12 prevails.

13 Your Honor, Plaintiff also referred to Stroud

14 and I do then -- I do need to speak to Stroud

15 briefly. And specifically to Paragraph 21 in Stroud,

16 because, as I said, this is an issue about causation.

17 THE COURT: I agree with you.

18 MR. BALASSA: Okay.

19 THE COURT: You don't have to talk to me

20 about that.

21 MR. BALASSA: Thank you.

22 THE COURT: I went over and over and over it

23 and I agree that Stroud is an argument about

24 limitation on contributory negligence and the damages

25 issue and whether they can be contributorily


208

1 negligent or not, not causation.

2 MR. BALASSA: Your Honor, the Plaintiff made

3 another argument. He said if our position were

4 accepted, then a plaintiff could never recover

5 against an audit firm for audit malpractice, and

6 that's simply not true. It is true that if a chief

7 accounting officer of a company were falsifying the

8 accounting records and he was doing that to benefit

9 the company, so the company could borrow more money,

10 for instance --

11 THE COURT: Like River Oak?

12 MR. BALASSA: Excuse me?

13 THE COURT: Like the River Oak case?


15 THE COURT: River Oak. Wasn't that what it

16 was? I have read so many, I can't remember. The guy

17 that was having the affair with the woman and they

18 were cooking the books together and --

19 MR. BALASSA: It sounds familiar, but that

20 may be a dozen other cases.

21 THE COURT: Okay. That one, I remember,

22 because it was an officer that was actually

23 participating in helping in the cover-up that was

24 confusing the audit.

25 MR. BALASSA: And if the chief financial


209

1 officer is involved in the fraud for the benefit of

2 the company, then that does get imputed to the

3 company and they can't -- the company then can't sue

4 the auditor.

5 But we are not proposing a rule that auditors

6 would be immune, in fact. It's not our rules that

7 we're setting forth. These are agency principles

8 that courts have applied in audit and other context

9 for many, many decades.

10 But let me be clear, if the individual at the

11 company who learns of the wrongdoing of the company

12 is not acting within the scope of their employment at

13 the company, then this argument doesn't apply.

14 So if it's a low-level employee who finds out

15 about something, or a janitor who's engaged in some

16 kind of fraud, that wouldn't get imputed to the

17 company, nor would this situation apply where the

18 auditor is being sued by a third party. The auditor

19 could be sued by a third party and he wouldn't have

20 issues of imputation.

21 THE COURT: Right. I can't remember what the

22 case is that you guys gave me with the -- it was an

23 older one. I think it was some guy that was

24 siphoning checks through a bank. And it was so far

25 off, that employee was so far out of the loop, the


210

1 Court found that -- anyway, I might be talking out of

2 turn.

3 MR. BALASSA: A ministerial employee, someone

4 who wasn't acting within the scope.

5 THE COURT: Correct. It was like a teller or

6 something like at that. It was one of the -- I can't

7 remember the name of the case, but -- I'm sorry.

8 MR. BALASSA: And that's right, Your Honor.

9 If someone's in a ministerial position and this isn't

10 in the scope of their authority in that position --

11 THE COURT: Correct.

12 MR. BALASSA: -- which is not our case here,

13 by any stretch, then there might not be imputation.

14 So these rules of agency, they wouldn't defeat

15 auditing claims across the board by any stretch. But

16 they do defeat auditing claims when they're brought

17 in these circumstances where an officer of the

18 company is engaged in some conduct for the company in

19 the scope of his employment and then the company

20 tries to sue the auditor.

21 Next, Your Honor, the Plaintiff says --

22 THE COURT: You know, I'm really done talking

23 about everything. I just have some questions about

24 something else real quick; is that okay?

25 MR. BALASSA: Of course, it is.


211

1 THE COURT: Okay. I always want to make sure

2 you guys have your opportunity to make any arguments

3 that you have. I'm going to ask you this quick thing

4 real quick. If we can move on. And it might not be

5 your argument, but the in pari delicto doctrine --

6 pari. Maybe I am saying that with an Oklahoma

7 accent. I apologize. I didn't take Latin in high

8 school. It was offered at my high school, but I did

9 not take it.

10 Anyway, are you prepared to talk to me about that?

11 MR. BALASSA: I am prepared.

12 THE COURT: Okay. I just didn't know if

13 somebody else would be tag teaming on that or

14 something.

15 Okay. I just need to understand, your

16 argument is that doctrine bars their claims for

17 professional negligence and breach of fiduciary duty.

18 And from what I can tell about that doctrine in your

19 argument, which I'm having to go back and forth on

20 the audit interference doctrine, and I know it's been

21 argued throughout by both parties and it's a whole

22 nother subject of another summary judgment motion,

23 but just so I understand, is your argument that you

24 want the jury to consider if -- whoever was doing,

25 Kivisto or someone else was doing -- was not within


212

1 the scope of their employment -- okay. Let's just

2 say that it wasn't. But you then can also get an

3 estoppel because the Plaintiffs knew or participated

4 in that bad behavior and, therefore, they are barred

5 from recovery, correct, or incorrect?

6 MR. BALASSA: That is part of our argument,

7 correct.

8 THE COURT: Okay. But that's the correct

9 summation of your argument? I am making sure I

10 understand your argument.

11 MR. BALASSA: That's correct.

12 THE COURT: Okay. So your argument is, in

13 summary judgment, that there are facts that are

14 undisputed that SemGroup knew or participated in the

15 behavior that was going on, which kind of ties into

16 the imputed knowledge argument; correct?

17 MR. BALASSA: Your Honor, to clarify, this is

18 really an argument for the Westback.

19 THE COURT: Okay.

20 MR. BALASSA: For the trading --

21 THE COURT: Okay. Got it.

22 MR. BALASSA: -- from our perspective, there

23 is just no question about Kivisto's responsibility.

24 And there is one other fact, if I could bring it to

25 Your Honor's attention --


213

1 THE COURT: Sure.

2 MR. BALASSA: -- on trading. It's occurred

3 to me Your Honor may not be aware -- the Plaintiff

4 has made some argument about, well, maybe the trading

5 wasn't for the benefit of SemGroup, and there are

6 facts on this that Plaintiff speculated on that as

7 well. Of course, Kivisto was a major SemGroup

8 shareholder; 92 percent of his net worth was tied in

9 to SemGroup. In fact, he had 232 million dollars of

10 SemGroup stock; hardly someone who would want to

11 trade for the purpose of injuring SemGroup. But

12 then more -- and the traders as well, so the trading

13 was for the benefit of SemGroup.

14 But we do have Plaintiff's trading expert

15 again. I just read you a passage from Scott Jones,

16 and he testified about why SemGroup engaged in

17 trading and the purpose. And he said the purpose was

18 to generate liquidity for the company, to generate

19 cash for the company, and he says it repeatedly in

20 his report -- he said it in deposition, too, but I

21 wanted to keep the citations brief -- and he says:

22 The assmption underlying this practice, the

23 speculative trading, was that SemGroup could generate

24 additional credit or liquidity for the company by

25 collecting premiums. At Paragraph 34: In an


214

1 apparent attempt to generate additional cash or

2 credit, SemGroup became a persistent seller or

3 creator of both call and put options --

4 (Off the record.)

5 MR. BALASSA: -- both call and put options,

6 which led to what Plaintiff says is speculative

7 positions. And Paragraph 62, that the trader started

8 selling options that were further in the money --

9 that means further exposed or risky -- in order to

10 generate larger option premiums.

11 So that is -- the Plaintiff's own trading

12 expert analyzed the situation, opines at length about

13 how the trading was to generate liquidity for

14 SemGroup for the benefit of the company.

15 THE COURT: Okay. So your argument is it was

16 for the benefit of SemGroup? Because what I am

17 trying to say is in the Westback claims, which is

18 what I thought you were arguing, is that he was -- or

19 what could be argued -- is that Kivisto was doing it

20 not within the scope of his authority and based on

21 the other cases that we would go through, that either

22 they were illegal or incorrect or done for his own

23 personal gain, because Westback was he and his wife's

24 own corporation; and, therefore, if it's not within

25 the scope of his employment, then it can't be imputed


215

1 to SemGroup. And then you have to look towards, if

2 it's not imputed, but it was still wrong and they

3 were actually participating in it themselves, then

4 they are barred from recovery.

5 MR. BALASSA: Our argument on Westback is

6 close to that. You are quite right, we're not taking

7 the position that Kivisto's conduct is imputed to the

8 company on Westback, because there are disputed

9 issues of facts around that.

10 But we are saying that there are others at

11 the company, the people who were responsible -- the

12 board members, the officers, and the managers -- who

13 were responsible for the accounting function and the

14 finance function of SemGroup, and that includes

15 Mr. Wallace, the board member and chief financial

16 officer; Mr. Stallings, the chief accounting officer;

17 Ms. Lewallen, who was the controller for the business

18 unit through which the Westback trading occurred; and

19 those people were, no question, aware of the Westback

20 relationship. The Plaintiff has admitted that in

21 interrogatory responses -- I have just three

22 documents, if Your Honor wants -- will allow me to

23 pursue this -- that they knew about the Westback

24 relationship.

25 And so it's not imputation through Kivisto;


216

1 it's imputation through the others, who memorialized

2 the relationship, put a contract in place for it,

3 made the accounting for it, and tracked the

4 receivable, and reported on the Westback

5 relationship; those people have that knowledge

6 through the course of their responsibilities, the

7 course of their employment. And so whether or not

8 Kivisto was doing it for his own personal benefit,

9 these other people were aware of it and, therefore,

10 it's imputed through them and through their

11 responsibilities.

12 THE COURT: Okay. No, I don't need you to

13 discuss it.

14 I am just going to call it, guys, when it

15 comes to -- I am going to say that there is -- just

16 figuring out the legal issues has been very helpful

17 to know where we're going and what the jury is going

18 to be having to decide in this case, but I think

19 there are too many facts out there and I think

20 everything is disputed: Whether the other people did

21 or didn't know; what they actually were or weren't

22 doing; whether Kivisto actually was speculatively

23 trading or if he wasn't; and if he was, was it within

24 the scope of his employment or was it outside the

25 scope of employment; did that go with the derivatives


217

1 trades or the Westback claims. I think there is --

2 there is not a place for me, as the Judge, to grant

3 summary judgment on those issues.

4 I also think I can't grant the in pari

5 delicto doctrine issue as well. By saying that, I am

6 not saying that you can't argue that in front of the

7 jury and that that might not be something that they

8 get to consider, but even if it wasn't within --

9 imputed to SemGroup, you still could be estopped from

10 getting damages because you participated in it

11 yourselves or someone else knew about it and

12 participated in it and, therefore, you cannot

13 collect.

14 So I am just going to make that ruling right

15 here. And then I want to move on to -- if anybody

16 needs to make an offer of proof or something else on

17 the record for those issues that I am denying under

18 four and five completely.

19 I think then we move to the audit

20 interference doctrine, which is the Plaintiff's

21 motion for your defense; okay?

22 MR. BALASSA: Ms. Cooper will handle that.

23 THE COURT: Okay.

24 Do you all need to make an offer of proof on

25 that area?


218

1 MR. BALASSA: Give me one moment to consult

2 with them.

3 THE COURT: Okay. No problem.

4 Are you up again, Keglovits?

5 MR. KEGLOVITS: I am.

6 THE COURT: I got to get organized. Hold on

7 a second.

8 (Off the record.)

9 THE COURT: We're on the record.

10 MR. BALASSA: Your Honor, our offer of proof

11 is contained in the materials that were submitted

12 with our summary judgment briefing and I want to

13 offer my apologies for speaking too quickly.

14 THE COURT: Thank you very much. She

15 appreciates that. Okay. We're off the record.


17 THE COURT: All right. We're back on the

18 record.

19 We are currently going to argue our last

20 thing of the day, which is Plaintiff Bettina Whyte's

21 motion for partial summary judgment on the seventh

22 defense of Defendant PricewaterhouseCoopers which is

23 audit interference doctrine. Yes, sir.

24 MR. KEGLOVITS: You heard a lot about Stroud,

25 so I will be very brief.


219

1 You've read our papers. You understand the

2 audit interference doctrine, which requires the

3 auditor to establish some evidence of interference

4 with his or her job to go to the jury on the issue of

5 comparative fault.

6 And I'll submit to Your Honor that while

7 Pricewaterhouse has pointed to some inconsistencies

8 between the representation letters, characterizations

9 of transactions in the representation letters, and

10 paragraphs of our Petition, the record is devoid of

11 any auditor saying in any way people at SemGroup

12 interfered with his or her ability to conduct the

13 audit. An inconsistency is not the same as

14 interference. What this record cries out for is

15 someone to say they were interfered with.

16 On the other hand, we have submitted to you

17 the record evidence on the subject from auditors,

18 from the letters that were written by the auditors

19 contemporaneously, and from the audit expert for

20 Pricewaterhouse, all of whom have testified to the

21 effect that they were provided all of the information

22 and all of the cooperation they needed during these

23 audits.

24 And so I would say, absent an auditor

25 submitting an affidavit saying, "My work was


220

1 interfered with," or absent the deposition testimony

2 from someone saying, "My work was interfered with,"

3 there is not enough evidence in the summary judgment

4 record to overcome what we have put in the unanimity

5 of people saying that there was no interference.

6 THE COURT: Okay. But what if the actions

7 themselves -- I mean, my problem with this --

8 And I'm sorry --

9 MS. COOPER: No, you're good.

10 THE COURT: -- Ms. Cooper.

11 My problem with this is, I don't think it's

12 just whether or not you, like, grab him a cup of

13 coffee or handed him some papers they ask for. If

14 you -- and I don't know if they're even going to --

15 and that was going to be a straightforward question

16 after them.

17 Are you guys actually going to argue with the

18 fact that SemGroup bent over backwards for what you

19 thought you were getting? I mean, if they asked you

20 to give you a paper, they gave it to you; if they

21 asked you to go meet here, they gave it to you. I

22 don't know if they are going to argue that that

23 wasn't done. But I think what goes outside of that

24 is that the interference can be that you are being

25 untruthful or distrusting in the information that you


221

1 are giving them or the information you aren't giving

2 them.

3 Do you agree that it's more than just we

4 gave -- "If they asked us for a piece of paper, we

5 gave it to them"?

6 MR. KEGLOVITS: Well, this gets -- two

7 responses to that.

8 THE COURT: Okay.

9 MR. KEGLOVITS: The first one is just a

10 procedural-type of response. Assuming for the moment

11 that that construct is the way it works --

12 THE COURT: Okay.

13 MR. KEGLOVITS: -- and they need an affidavit

14 or a declaration from somebody that says, "This

15 particular statement when told to me, I believe now

16 was false and, therefore, interfered with my audit,"

17 nothing in the summary judgment record to that

18 effect.

19 So even if we accept that construct, there is

20 no summary judgment evidence that gets them to where

21 they need to go; we win.

22 But I would say this, this is a unique

23 situation, the auditor situation.


25 MR. KEGLOVITS: The auditor's job is to check


222

1 whether the things they are being told and the

2 evidence they are being given is right. And so when

3 the auditors come in and ask, "Give me all of the

4 documents about Westback. Tell me everything about

5 Westback," they're supposed to check that stuff.

6 It's not enough for them to say to Mr. Kivisto, "Is

7 Westback above the Board?" "Sure." "Is it

8 approved?" "Sure." "Does it violate any bank

9 covenants?" "I don't think so." "Well, good. We

10 can all go home now. No need to do an audit,"

11 because they told us that. That kind of obscures the

12 role of the auditor. So --

13 THE COURT: Actually, I have questions here.

14 When I am thinking through what your arguments are,

15 one of my thoughts was, what is the auditing

16 standard? Are you relying solely on what you are

17 told? And then is it your responsibility, if they

18 say, "Hey, we're -- we're this today," and the

19 auditors go, "Yay. Okay." And they just take that

20 for what it is and you guys gave them what they

21 needed, they took it at what it was worth, and you're

22 done?

23 And I understand that argument, too, and I

24 think that it's going to be factually probably a

25 question --


223

1 MR. KEGLOVITS: Uh-huh.

2 THE COURT: -- right?

3 MR. KEGLOVITS: And, you know, we tried to

4 draw out of their expert -- because there was nothing

5 in his expert report that said anything about

6 interference in the audit. And so I sat there and I

7 asked that man was there anything that they needed

8 that they weren't given, any information that was

9 necessary, and he said no.

10 So, I mean, what I've read in their brief now

11 is, "Yay, you asked them if they got everything, but

12 you didn't ask them whether any of it was truthful."

13 Well, I think we are well past the point now in

14 trying to supplement his expert report by saying,

15 "Oh, yeah, and, by the way, there were all these

16 things that were untruthful that I didn't put in my

17 report, I didn't tell you about, and I think that

18 they constituted audit interference." There is just

19 nothing in the expert report about it.

20 And the truth is, they knew everything. They

21 just made decisions based on it and they're not happy

22 with those decisions now and they want to try to

23 blame it on SemGroup.

24 THE COURT: Thank you. That was my question.

25 Yes, ma'am.


224

1 MS. COOPER: Judge, I've got a couple of

2 binders and I'm going to try not to give them to you.

3 THE COURT: Okay.

4 MS. COOPER: How about that?

5 THE COURT: Yay.

6 MS. COOPER: What Mr. Keglovits just said

7 was --

8 THE COURT: A lot of exclamation marks after

9 that, Diana.

10 MS. COOPER: After the "Yay." I want that.

11 THE COURT: Yay.

12 MS. COOPER: Especially since I am starting

13 at 4:00 o'clock.

14 Judge, what Mr. Keglovits just said was that

15 our expert said that SemGroup gave them everything

16 that they asked for, the auditors. What

17 Mr. Keglovits didn't say is our expert never said

18 that everything that SemGroup gave them, he checked

19 the veracity and he thought that it was truthful.

20 You said earlier in talking about Stroud --

21 and one of the tenets in Stroud -- Footnote 8,

22 please.

23 And, you know, Stroud is this outlier case

24 that we have that talks about audit interference and

25 really all it is telling us is how we talk about


225

1 comparative negligence in an auditing case; right?

2 So in Stroud, Mr. Keglovits has said, "Gosh,

3 they've got to have an affidavit of an auditor saying

4 that there was auditor interference." There was

5 nothing like that in Stroud. There was an argument

6 that the Plaintiff had been contributorily negligent;

7 the Judge instructed the jury on contributory

8 negligence through this auditor interference concept;

9 and the jury considered whether it believed that

10 there had been auditor interference or not. There

11 was no affidavit from some auditor saying, "We

12 believe that there was auditor inference in the

13 case." I mean, this is something that is appropriate

14 for the jury to consider.

15 So Mr. Keglovits several times today has said

16 you've got to look at any scintilla of fact when

17 you're evaluating the summary judgment. You've got

18 to evaluate everything as against the moving party.

19 So when you do this, look at what Stroud

20 says. This is how the Stroud court came up with --

21 and the Oklahoma Supreme Court said this is right --

22 this is how they came up with it, and it is: The

23 negligence of the employer is a defense only when

24 it's contributed to the accountant's failure to

25 perform his contract and to report the truth.


226

1 Now, the Plaintiff's allegations in this case, if

2 taken as true, and if the jury believes them, means

3 that SemGroup reported to us a misrepresentative, and

4 that we took those and the management letter, and Mr.

5 Kivisto said, "You can't just take the management

6 letter and say that's it, 'We're done with our

7 audit.'" We agree with that.

8 But a management representation to us is part

9 of what we rely upon. And I know it's late, Judge,

10 and I know and appreciate that Mr. Keglovits's

11 argument was short, but if you'll bear with me.

12 If we look at Exhibit No. 11 -- and if you

13 want me to hand up the binder, I will, Your Honor --

14 this is the contract that's been talked about a lot

15 today between PricewaterhouseCoopers and SemGroup.

16 And in this, we tell them that the written

17 representations that are made comprise the evidential

18 matter that we intend to rely upon in forming our

19 opinion in the financial statements. That's part of

20 what we rely upon.

21 Mr. Keglovits's argument, "Gosh, you can't

22 just stop there and say that we're not going to do

23 anything else," we're not suggesting that that's

24 appropriate.

25 But for the Plaintiffs to prevail on this


227

1 summary judgment, they would have to suggest that if

2 SemGroup made representations to us in their

3 management letter that were untrue, that's not

4 enough, that's not a question of fact for the jury,

5 and that's just not right, Your Honor.

6 So we tell them in our contract, "We rely on your

7 representations in forming the opinions that we're

8 going to issue."

9 And I won't belabor this, Your Honor, but we

10 have several depositions that we cited for you in the

11 record. They're Exhibits 12, 13, 14, 15 and 16.

12 But let's just play 13, please, which is Alex

13 Stallings, and this is the chief accounting officer,

14 and his testimony about whether or not SemGroup knew

15 that we were relying upon these written

16 representations.

17 Do we have the video, please?

18 So the question and answer are shown at the

19 right.

20 THE COURT: Okay. Hold on. Are you going to

21 play audio?

22 MS. COOPER: I am trying to.

23 THE COURT: Okay. Wait. Hold on. Sorry. I

24 don't want her to have to try to --

25 You don't want to try to record that, do you,


228

1 Diana?

2 MS. COOPER: No, she doesn't need to record

3 it, but the text is up.

4 THE REPORTER: We're off the record?

5 THE COURT: Yeah. What I'm going to say

6 is -- Wait. Hold on. On the record. If you can

7 point out what portion you're going to play and then

8 we'll go off the record.

9 MS. COOPER: You bet.


11 MS. COOPER: It is -- I've got the text here

12 that might assist.

13 THE COURT: No, I need you to say --


15 THE COURT: -- this is Mr. Stallings'

16 deposition.

17 MS. COOPER: And it's Exhibit No. 13, Your

18 Honor, to --

19 THE COURT: To your response?

20 MS. COOPER: Yes, ma'am.

21 THE COURT: All right. Okay. This is just

22 playing -- what part? The whole Page 138 through

23 141?

24 MS. COOPER: No, it's actually Page --

25 excuse me -- Lines 24 through Line 6 on the next


229

1 page, Your Honor.

2 THE COURT: I'm looking at his deposition.

3 MS. COOPER: It's Page 141.

4 THE COURT: Thank you, ma'am. And you are

5 playing Lines 16 through 25?

6 MS. COOPER: 14 through 18.

7 THE COURT: Okay. We have made the record.

8 We can go off the record now.

9 (Off the record.)

10 MS. COOPER: And, Your Honor, we have clips

11 that we've attached in our papers on opposing this

12 motion for judgment where Greg Wallace says the same

13 thing and he is the CFO and I can play these, if you

14 would like me to, but all of the management says,

15 "We understood that PwC was relying upon our written

16 representations."

17 THE COURT: You don't have to; I have read

18 them. I mean, I have read each one of your exhibits.

19 MS. COOPER: So then we get into, Your Honor,

20 what is the Plaintiff alleging in this case. And if

21 we look at Plaintiff's Petition, No. 17, and compare

22 that to what was in the representation letter --

23 and, Your Honor, on the screen it shows that in the

24 Paragraph No. 17 of the Petition, the Plaintiff

25 claims the Westback trading arrangement violated


230

1 SemGroup's credit agreement with lenders, its bond

2 indenture, and its risk management policy. If you

3 look at the Exhibits 7 and 9, which are the SemGroup

4 management representation letters from 2007 and 2008,

5 SemGroup has made a representation of just the

6 opposite, Your Honor.

7 So it's our position that if the jury accepts

8 Plaintiff's allegation -- and this is just an example

9 in Plaintiff's Petition No. 17 -- then SemGroup

10 provided to PricewaterhouseCoopers information that

11 was untrue and that presents a question of fact that

12 is appropriate for the jury to consider whether or

13 not there has been audit interference, which is how

14 our Supreme Court tells us we consider contributory

15 negligence in an audit case like this.

16 So is there in Mr. Keglovits's parlance from

17 this morning, any scintilla of fact that the jury --

18 a difference of opinion on this auditor interference?

19 Of course, there is.

20 This is one example, which is Plaintiff's

21 Petition Paragraph 17. Another is Plaintiff's

22 Petition 32 where the claim is made that Kivisto's

23 trading strategy violated SemGroup's internal

24 policies, its credit agreements and bond indenture.

25 And you can see again from the management letters


231

1 that we got from SemGroup, the representation was

2 made that the partnership has not violated any

3 covenants on debt subordinated debentures and other

4 obligations during any of the periods recorded.

5 So, Your Honor, that's enough to present a question

6 of fact to the jury on whether or not there has been

7 auditor inference in the -- I mean -- excuse me --

8 yes -- whether there has been auditor interference in

9 this case.

10 Mr. Keglovits refers to the Stroud case.

11 And, in fact, the Stroud case and the 1939 case that

12 the Oklahoma Supreme Court looked to for the audit

13 interference principle --

14 THE COURT: Is that the Illinois case?

15 MS. COOPER: Yes, ma'am.

16 THE COURT: Okay.

17 MS. COOPER: Those are the only two cases

18 cited by the Plaintiff. And in both of those cases

19 this was a question of fact for the jury to consider

20 and, that is, whether or not there has been audit

21 interference, contributory negligence in this case.

22 Another example where we have the same thing,

23 which is in Paragraph No. 66 of Exhibit 5, which is

24 the Plaintiff's expert's report, which is stating

25 that the trading activity violated each of the loan


232

1 covenants as SemGroup engaged in speculative trading.

2 This is the testimony of John Norton, one of the PwC

3 folks on the audit team, who said that he was told by

4 PwC (sic) that there was no speculative trading. I'm

5 sorry, SemGroup. But he was told there was no

6 speculative trading.

7 So, Your Honor, is there a question of fact

8 for the jury, when you look at this, as to whether or

9 not -- if the Plaintiff is able to convince the jury

10 that their allegations are correct, then PwC -- then

11 SemGroup made misrepresentations to PwC;

12 contractually, they knew that we would rely upon

13 them, we're required to get this management letter.

14 We have told them through our contract that we rely

15 on what they tell us in the management letter. And

16 it would have affected the course of our audit if

17 they had given us different representations in the

18 management letter. That's enough, Your Honor, to

19 have the jury consider this issue.

20 Now, just an aside on contributory

21 negligence, we have a constitutional provision saying

22 that this is -- we have a constitutional provision,

23 which is Article 23, Section 6, which states that

24 contributory negligence is a question of fact left to

25 the jury. We have presented competent evidence, Your


233

1 Honor, that, in fact, if the Plaintiff is able to

2 convince the jury that their allegations are correct,

3 that SemGroup provided us with inaccurate and

4 misleading information. In the body of Stroud, it

5 talks about truthful information. That's enough,

6 Your Honor, to defeat their motion for summary

7 judgment and give this to a jury. Can I answer any

8 questions.


10 MS. COOPER: Can I answer any questions?

11 THE COURT: No, ma'am. I was going to let

12 Mr. Keglovits respond and then if I have questions, I

13 can ask.

14 MS. COOPER: Sure.


16 Yes, sir.

17 MR. KEGLOVITS: Well, I think you've got the

18 competing views on what the standard is right before

19 you. You heard from PricewaterhouseCoopers that all

20 they have to do is present a question of fact about

21 whether what we said was true and that's enough.

22 I don't read Stroud that way. I think Stroud

23 says they have to do two things: They have to show

24 that there was an untruthful statement and that it

25 interfered with their audit. And while you heard


234

1 testimony up here from SemGroup's side,

2 Mr. Stallings, you never heard from an auditor saying

3 that an untrue statement would have or did interfere

4 with their audit. Their expert didn't say that any

5 untrue statement would have or did interfere with the

6 audit. And so the record is bare on summary judgment

7 about interference.

8 One last point on Stroud, I don't have the

9 benefit of knowing -- maybe I forgot -- whether

10 Stroud was a summary judgment case.

11 THE COURT: No, it's a jury.

12 MR. KEGLOVITS: That's what I thought. So we

13 don't know whether anyone ever moved for summary

14 judgment in Stroud and there was an examination of

15 whether an affidavit was needed or not. We don't

16 know what the testimony was before or if there was a

17 motion for directed verdict.

18 So all we know is what Rule 13 and 12 O.S.

19 2056 required. We have come forward with summary

20 judgment evidence from which you could reasonably

21 conclude that there was no interference.

22 Pricewaterhouse has come forward with summary

23 judgment evidence that says, "We think you guys might

24 have told a lie." But they haven't come forward with

25 summary judgment evidence that says, "And it


235

1 interfered with our audit." That's what they are

2 missing and I think we're entitled to summary

3 judgment because of that.

4 MS. COOPER: May I brief -- no? Thank you.

5 THE COURT: Okay. Well, I think I understand

6 what everyone is trying to say and I thought the

7 Stroud case was very interesting, because it really

8 gets down to when the negligence happened by the

9 person that they're auditing, and if it was

10 negligence that actually contributed to the auditor's

11 failure versus just it being a bad thing that the

12 auditor should have found and reported? I think it's

13 a question of fact for the jury and I am going to

14 allow that to stand, that defense to stand.

15 At this point, it doesn't mean after I hear

16 all of the evidence at some point that you might move

17 again for me to have a directed verdict that they

18 didn't prove an actual interference with the audit,

19 but at this point I think there is enough in the

20 record that's been presented that that could be a

21 factual question for the jury and I'll note your

22 exception and deny your request.

23 All right. Is there anything else that we

24 need to discuss on the record, because I know we have

25 some things to discuss off the record?


236

1 Yes, sir.

2 MR. BALASSA: One thing, Your Honor. It's a

3 housekeeping issue and I raise it just with

4 trepidation, knowing how long we've been here today.

5 THE COURT: Are you going to talk about the

6 motions in limine?

7 MR. BALASSA: I'm going to talk about, just

8 refer to, a motion in limine that Your Honor said

9 would be resolved at the summary judgment hearing.

10 THE COURT: See, I just said, is it about

11 motion in limine; you said no. Yeah, I know what

12 you're going to say.

13 MR. BALASSA: It's been a long day for me as

14 well. I want to point out, Your Honor, in Your

15 Honor's ruling on PwC's motions in limine 4 and 5, we

16 didn't argue, we didn't get to the issue of

17 third-party reliance, because Your Honor determined

18 there was a disputed issue in material fact as to

19 whether Kivisto's conduct gets imputed to SemGroup.


21 MR. BALASSA: And so we didn't end up arguing

22 what I think is purely a legal issue, which is, if a

23 third -- if Plaintiff can rely on reliance by a third

24 party in order to pursue a claim against PwC and --

25 THE COURT: Okay. I should have -- I even


237

1 thought about it last night. I thought, I know I had

2 held some things in abeyance in the motions in

3 limine, because I thought that the summary judgment

4 motion arguments, my rulings on those were to be

5 determinative of those motions, and right now I would

6 have to see it. I did not bring them. I did not

7 print it off. Are you saying that there is something

8 we need to discuss today?

9 MR. BALASSA: No.

10 THE COURT: Okay. Good. All right. But I

11 am aware that there are things held in abeyance that

12 we need to make sure we are all clear on, based on my

13 rulings, and how they will affect the motions in

14 summary judgment; correct?

15 MR. BALASSA: And, Your Honor, we would

16 propose, if there is another day that's convenient

17 for the Court, we could argue the motion in limine

18 that day.

19 THE COURT: Or what I would probably even

20 propose is you guys can get together and, by some

21 miracle, agree what my rulings today mean when it

22 comes to those rulings in the motions in limine or,

23 actually, what I can even propose doing, if you guys

24 would quit coming up with these issues for me to

25 read -- like lawyer stuff, I was prepared to go back


238

1 and look at the motions in limine and make a ruling,

2 because really it's my job, because I held my ruling

3 in abeyance for my decisions on this.

4 So I have no problem going back and reviewing

5 the motions in limine for what I did hold in abeyance

6 and issuing a new ruling on those motions based on my

7 rulings today; I can do that.

8 MR. BALASSA: Okay. And, Your Honor, our

9 position, of course, is we didn't even reach the

10 argument of third-party reliance because Your Honor

11 decided -- denied the motions for summary judgment

12 four and five on a different ground, and so that the

13 ruling wouldn't have any bearing on the open issue,

14 purely legal question, of third-party reliance, which

15 we believe has been briefed in the motion in limine,

16 but we would be happy to submit anything further the

17 Court would like or address it at the Court's

18 convenience.

19 THE COURT: Okay. So what we're going to do

20 is I am going to go back and I am going to look at

21 the motions in limine and I am going to see what I

22 held in abeyance. I'm going to see if, based on my

23 rulings today, that I can make a further ruling on

24 those motions. If I can't, I will look at the

25 briefing to make a decision on that motion. And if


239

1 the briefing doesn't help me and I need more argument

2 in order to determine the motion in limine that I

3 held in abeyance, I will ask for a hearing that you

4 all will be noticed and be prepared for argument, and

5 I'll limit it very specifically to what I need to

6 hear. Is that fair?

7 MR. BALASSA: Thank you, Judge. Very fair.

8 THE COURT: Okay. No problem. I can get

9 that done for you.

10 Yes, Mr. Keglovits?

11 MR. KEGLOVITS: Would you like us to put

12 together our list of things we think we want to talk

13 about at the pretrial conference? Listening to this

14 made me think about that and maybe submit it to you

15 before.

16 THE COURT: That would be great. Yeah, it

17 will be shorter if I am prepared on what you guys are

18 going to talk about. If I am surprised by something,

19 it's going to take longer.

20 MR. KEGLOVITS: How long do you think you

21 have for us?

22 THE COURT: Let's be off the record.

23 (Proceedings concluded.)

24

25


240

1 C E R T I F I C A T E

2

3 STATE OF OKLAHOMASTATE OF OKLAHOMASTATE OF OKLAHOMASTATE OF OKLAHOMA ) ))))

4 SS:SS:SS:SS: ) ) ) ) ))))

5 COUNTY OF TULSACOUNTY OF TULSACOUNTY OF TULSACOUNTY OF TULSA ))))

6

7 I, I, I, I, Diana Cavenah, a Certified Shorthand Diana Cavenah, a Certified Shorthand Diana Cavenah, a Certified Shorthand Diana Cavenah, a Certified Shorthand

8 Reporter in and for the State of Oklahoma, do hereby Reporter in and for the State of Oklahoma, do hereby Reporter in and for the State of Oklahoma, do hereby Reporter in and for the State of Oklahoma, do hereby

9 certify that the foregoing is a true and correct certify that the foregoing is a true and correct certify that the foregoing is a true and correct certify that the foregoing is a true and correct

10 transcript of the proceedings had in Case No. transcript of the proceedings had in Case No. transcript of the proceedings had in Case No. transcript of the proceedings had in Case No.

11 CJ-2010-4042 taken on January 17, 2014CJ-2010-4042 taken on January 17, 2014CJ-2010-4042 taken on January 17, 2014CJ-2010-4042 taken on January 17, 2014 before the before the before the before the

12 Honorable Dana L. Kuehn; and that said transcript is Honorable Dana L. Kuehn; and that said transcript is Honorable Dana L. Kuehn; and that said transcript is Honorable Dana L. Kuehn; and that said transcript is

13 a true and correct transcription of my stenographic a true and correct transcription of my stenographic a true and correct transcription of my stenographic a true and correct transcription of my stenographic

14 notes; and that I am not related to nor attorney for notes; and that I am not related to nor attorney for notes; and that I am not related to nor attorney for notes; and that I am not related to nor attorney for

15 either of said parties nor otherwise interested in either of said parties nor otherwise interested in either of said parties nor otherwise interested in either of said parties nor otherwise interested in

16 the event of said action. the event of said action. the event of said action. the event of said action.

17 WITNESS WITNESS WITNESS WITNESS my hand and seal this my hand and seal this my hand and seal this my hand and seal this ______ day ______ day ______ day ______ day ofofofof

18 ________________________________________________________________________________________________, , , , _____._____._____._____.

19

20 ____________________________________________________________________________________________________________________________________ Diana Cavenah, Diana Cavenah, Diana Cavenah, Diana Cavenah, CSR, RPRCSR, RPRCSR, RPRCSR, RPR

21 CSR No. CSR No. CSR No. CSR No. 01524015240152401524

22

23

24

25


1 IN THE DISTRICT COURT OF TULSA COUNTYIN THE DISTRICT...

Documents

Transcript of 1 IN THE DISTRICT COURT OF TULSA COUNTYIN THE DISTRICT...