317 F.R.D. 147
D.N.M.2016Background
- SEC sued former Thornburg Mortgage officers Goldstone, Simmons, and Starrett alleging false statements/omissions in the 2007 Form 10-K and related auditor deception; factual disputes remained for trial after summary judgment rulings.
- Starrett (former chief accounting officer) settled with the SEC shortly before trial by consent order that neither admitted nor denied the allegations and did not require her to testify for any party.
- Defendants move to exclude any reference to Starrett’s SEC settlement and to bar the SEC from using leading questions on direct examination of Starrett.
- SEC seeks limited use of settlement evidence to avoid juror confusion, to show Starrett’s bias, and to permit leading questions because Starrett remains aligned with defendants.
- At hearing, the court expressed concern that revealing settlement terms could unfairly suggest guilt by association, but recognized the SEC may need to impeach or show bias if Starrett is uncooperative.
- Court ruled: SEC may ask (including by leading questions on cross/examination) whether it investigated and sued Starrett for her Thornburg conduct, but may not introduce other settlement evidence or the settlement terms; decision on whether SEC may lead Starrett on direct is reserved until trial after observing her demeanor and answers.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Admissibility of evidence that Starrett settled with the SEC | Settlement evidence is relevant to completeness, explains why Starrett is not a defendant, and shows bias; admissible under Rule 408 for bias and under Rule 803(8)(C) for the SEC Order | Settlement evidence is barred by Rule 408 and is more prejudicial than probative under Rules 401/403; will imply an admission and unfairly prejudice remaining defendants | Limited admission: SEC may state it investigated and sued Starrett based on Thornburg conduct, but may not introduce or reference settlement terms or other settlement evidence |
| Use of SEC administrative Order Instituting Proceedings (OIP) as evidence | OIP is public agency finding admissible under Rule 803(8)(C) to explain status and bias | OIP would be prejudicial and is of limited probative value because defendants could not challenge the findings | Not admitted as settlement evidence; court views OIP as equivalent to settlement material and excludes it from trial evidence (except that SEC may only say it sued/investigated) |
| Whether SEC may ask leading questions of Starrett on direct | Starrett is identified with the defendants (former co-defendant, joint-defense ties, close personal ties) and thus may be treated as adverse/hostile under Rule 611(c) | Starrett’s settlement makes her no longer adverse; defendants argue SEC must show hostility or uncooperativeness before allowing leading questions | Deferred: Court will decide at trial after observing Starrett; indicated likely to permit leading if she remains aligned with defendants or is hostile, but will not rule in advance |
| Scope of permitted questioning about Starrett’s status | SEC should be permitted to elicit investigation/lawsuit to test credibility and avoid juror confusion | Any reference to being sued/settled is unfairly prejudicial and irrelevant to defendants’ guilt | Permitted limited questioning: SEC may ask (and elicit yes/no answers) that it investigated and sued Starrett for her Thornburg role, but must stop short of settlement terms or other details; defendants may propose limiting instruction |
Key Cases Cited
- Leon v. FedEx Ground Package Sys., Inc., 163 F. Supp. 3d 1050 (D.N.M. 2016) (excluding co-defendant settlement evidence where jury might infer admission of guilt or apportion liability)
- Belton v. Fibreboard Corp., 724 F.2d 500 (5th Cir. 1984) (admitting settlement evidence to prevent jury confusion under appropriate circumstances)
- Wallis v. Carco Carriage Corp., 124 F.3d 218 (10th Cir. 1997) (approving limited inquiry into a settling co-defendant’s liability while excluding settlement terms)
- United States v. Diaz, 662 F.2d 713 (11th Cir. 1981) (witnesses who cooperate under agreement may nevertheless be treated as hostile to government and subject to leading questions)
- Sprint/United Mgmt. Co. v. Mendelsohn, 552 U.S. 379 (2008) (trial courts afforded broad discretion under Rule 403 to balance probative value and prejudice)