1 1 BEFORE THE UNITED STATES 2 FEDERAL ENERGY REGULATORY COMMISSION 3 4 - - - - - - - - - - - - - - x 5 In the Matter of: THE : 6 INVESTIGATION OF : 7 PJM UP-TOS CONGESTION : 8 TRANSACTIONS : 9 - - - - - - - - - - - - - - x 10 11 12 DEPOSITION OF RICHARD J. GATES 13 REDACTED 15 16 17 18 19 Philadelphia, Pennsylvania 20 Monday, May 7, 2012 21 22 23 REPORTED BY: 24 DONALD R. THACKER 25 2 1 Deposition of RICHARD J. GATES called for further 2 examination pursuant to notice of deposition, on Monday, 3 May 7, 2012, in Philadelphia, Pennsylvania at the Offices 4 of Drinker, Biddle & Reath, One Logan Square, Suite 2000 at 5 9:19 a.m., before DONALD R. THACKER, a Notary Public within 6 and for the Commonwealth of Virginia, when were present on 7 behalf of the respective parties: 8 9 STEVEN TABACKMAN, ESQ. 10 JAMES C. OWENS, ESQ. 11 Attorney Advisors 12 Division of Investigation 13 Federal Energy Regulatory Commission 14 Office of Enforcement 15 888 First Street, Northeast 16 Washington, DC 20426 17 On behalf of FERC 18 19 WILLIAM M. McSWAIN, ESQ. 20 Drinker, Biddle & Reath, LLP 21 One Logan Square, Suite 2000 22 Philadelphia, Pennsylvania 19103-6996 23 215.988.2775 24 William.McSwain@dbr.com 25 On behalf of Powhatan and the witness 3 1 P R O C E E D I N G S 2 Whereupon, 3 RICHARD J. GATES 4 was called as a witness and, having first been duly sworn, 5 was examined and testified as follows: 6 EXAMINATION 7 BY MR. TABACKMAN: 8 Q Sir, would you please state your full name for 9 the record. 10 A Richard John Gates. 11 Q Mr. Gates, I have introduced myself before, my 12 name is Steven Tabackman, S-t-e-v-e-n, I go by Steve. This 13 is James Owens. We are both officers, members and Staff of 14 the Federal Energy Regulatory Commission, and for these 15 purposes Officers of the Commission for this investigation. 16 Are you represented by counsel today, Mr. Gates? 17 A Yes. 18 Q And who is your counsel, just say his name for 19 the record, if you would? 20 MR. McSWAIN: I can jump in, Bill McSwain from 21 Drinker, Biddle, representing Powhatan and the witness, 22 Mr. Gates. 23 BY MR. TABACKMAN: 24 Q And Mr. Gates, you are satisfied that 25 Mr. McSwain can represent you and Powhatan and the other 4 1 people, I take it, in this matter? 2 A Yes. 3 Q I should tell you, just to go over some ground 4 rules at the beginning, we have got them written down so I 5 don't miss any of them. This is a formal, non-public 6 investigation, being conducted under FERC's regulations to 7 ascertain whether certain entities violated federal energy 8 laws, orders or regulations; do you understand that? 9 A I do. 10 Q Okay. I should tell you that whoever willfully 11 states, subscribes under oath to any material matter, 12 states something under oath that is not true, can be guilty 13 of perjury; do you understand that, that would be a crime? 14 A Yes. 15 Q And you understand that you are under oath, you 16 are sworn to tell the truth today? 17 A I do. 18 Q And again, just to reiterate, Mr. Owens and I 19 are Officers of the United States for purposes of today's 20 proceedings. 21 Have you ever been deposed before? 22 A Yes. 23 Q Roughly when was that? 24 A Roughly 2004 and roughly another time in 2008. 25 Q Okay. And I just want to go over some general 5 1 instructions about depositions, and I am sure you have 2 heard these before and I know Mr. McSwain has probably gone 3 over them with you also. 4 If there is anything that you don't understand 5 about what I am about to say, please let me know, and that 6 is the first instruction. If at any time during the course 7 of these proceedings you don't understand the question that 8 I have asked you, you have some, you are not sure exactly 9 what it is that I am referring to, please let me know, 10 okay, by saying that you don't understand and you need some 11 clarification; can we have that agreement? 12 A Yes. 13 Q Because otherwise, if you answer the question I 14 think you have understood it and then we get into a lot of 15 confusion down the road. I am going to try and be as 16 precise as I can in my questions, but if there is anything 17 that you don't understand please let me know. 18 Another thing that we have to be careful about 19 is talking over each other. I will try to speak and so let 20 you know clearly when the end of my question is, and I will 21 try not to talk over you, but if we talk at the same time, 22 and that sometimes happens, more frequently than it should, 23 but I am guilty of it, then the reporter can't get it down 24 clearly. So, we have to listen to each other and try not 25 to talk over each other; can we have that agreement also? 6 1 A Yes. 2 Q As you know, everything, all your answers need 3 to be in words, the court reporter can't take down nods, 4 shaking your head, rolling your eyes, whatever; you 5 understand that? 6 A I do. 7 Q Okay. I will be primarily the person asking 8 questions, Mr. Owens may have some questions, we will try 9 not to jump in and be too confusing in that, but we will 10 both be asking questions; do you understand that? 11 A Yes. 12 Q You understand that you may refuse to answer any 13 question on the grounds that it may tend to incriminate 14 you, it is a Fifth Amendment privilege, however, do you 15 understand that? 16 A I do. 17 Q Do you understand also that in a civil 18 proceeding or a regulatory proceeding inferences can be 19 drawn from your non, not answering a question on those 20 grounds; do you understand that? 21 A Yes. 22 Q At any time that you need a break please let me 23 know. If there is a question pending, however, we won't 24 break until after you have answered the question; do you 25 understand? 7 1 A Yes. 2 Q I may be giving you in the course of the 3 questioning some exhibits to look at, we take back all the 4 exhibits that we use during the course of a deposition, so 5 I would ask you not to make any notes on those. I don't 6 want to see your personal notes, but you can't keep the 7 exhibit; do we understand, do you understand that? 8 A Yes. 9 Q What was the subject matter on which you were 10 deposed previously, just generally, I don't need to not 11 details of it? 12 A A class action lawsuit against an entity. 13 Q Okay, that is fair. And let me ask you a couple 14 other questions, were you one of the parties to the 15 litigation or were you a witness only, what were the 16 circumstances of that? 17 A I was both a party and a witness. 18 Q Were you sued or were you suing someone? 19 A Suing the, we were the plaintiff. 20 Q Today are you taking any medication or any kinds 21 of drugs that would keep you from being able to understand 22 questions and give truthful answers to the best of your 23 ability? 24 A No. 25 Q Are you aware of any reason that you can't give 8 1 full and complete testimony today? 2 A I am aware of no reason. 3 Q Okay. You are appearing voluntarily for this 4 deposition; is that correct? 5 A Yes. 6 Q Have you ever testified in a FERC proceeding 7 before? 8 A No. 9 Q I want to talk to you just a moment about the 10 preparation for the deposition. I don't want to know about 11 anything that you and Mr. McSwain may have said to each 12 other, but in the prior to today have you reviewed any 13 documents to get ready for this deposition? 14 A Yes. 15 Q And when did you do that? 16 A Last week. 17 Q And what kinds of documents were those? 18 A Communications. 19 Q Were those documents that had been produced to 20 FERC in the course of this investigation? 21 A Yes. 22 Q Was anyone with you when you were reviewing 23 them? 24 A Yes. 25 Q Who was that? 9 1 A Bill McSwain and his associate. 2 Q I don't want to know anything that -- did you 3 talk to anybody else other than Mr. McSwain and his 4 associate about the content of any of the documents that 5 you reviewed? 6 A Yes. 7 Q Who else did you speak with? 8 A Kevin Gates. 9 Q And can you, Kevin Gates is your brother? 10 A He is. 11 Q And what was the, when did you speak to 12 Mr. Gates about these documents? 13 A Last week. 14 Q What was your reason for talking with him, to 15 him about these documents? 16 A I was seeking his perspective. 17 Q On, can you recall which documents or the 18 subject matter that you wanted his perspective on? 19 A Could you repeat the question, please. 20 (The reporter read the record as requested.) 21 BY MR. TABACKMAN: 22 Q Let me clarify that. What was the subject 23 matter that the documents that you spoke to him about, what 24 did the documents talk about? 25 A They talked about our knowledge or lack thereof 10 1 of the investments that we were making. 2 Q Were you the author of any of these documents? 3 A I don't recall. 4 Q Were you the recipient of any of the documents? 5 A Yes. 6 Q Were the documents between -- did you also look 7 at documents that involved, that exchanged communications 8 between your brother and Alan Chen? 9 A Could you repeat the question? 10 Q In reviewing the documents and talking to your 11 brother, did any of the documents you discussed with your 12 brother, were they communications between him and Alan 13 Chen? 14 A I don't recall. 15 Q What do you recall about the documents you 16 talked to him about? 17 A That our conversation was very short, the 18 communication was very limited, and it was related to 19 documents that made us feel like this would be a very, a 20 comfortable deposition, a comfortable position to defend. 21 Q Were some of the documents e-mails that you had 22 reviewed, did you talk to your brother about those? 23 A Yes. 24 Q Did you talk to him, were you face to face or 25 were you on the phone? 11 1 A Face to face. 2 Q Did you have the documents with you that you 3 wanted to get his perspective on? Let me rephrase that. 4 Were the two of you able to look at the documents as you 5 were talking about them? 6 A I don't believe so. 7 Q You don't, you can't recall whether you had 8 documents with you when you were talking with your brother? 9 A That is correct. 10 Q Did he have any, do you recall if he brought any 11 documents to this conversation? 12 A He did not have any documents. 13 Q Do you think you might have had documents? 14 A Are you asking me to speculate? 15 Q I am asking you what your best recollection is, 16 what your best recollection as to whether or not you had 17 brought documents that you and your brother discussed? 18 A If I were to speculate I would say the answer is 19 no, I did not have documents. 20 Q Were there, do you have a recollection of you 21 and your brother looking at pieces of paper and having a 22 conversation about the contents of the pieces of paper? 23 A No. 24 Q Did you read your brother's deposition testimony 25 at any time prior to today? 12 1 A I don't recall. 2 Q Have you seen, do you recall whether you have 3 seen the document that contains his testimony? 4 A I don't recall. If I had, it had been more than 5 six months ago. 6 Q Do you recall anyone if anyone ever gave you 7 that, the deposition testimony to look at? 8 A I don't recall. 9 Q Do you recall having any conversations with your 10 brother about his deposition testimony? 11 A Yes. 12 Q When did you have those conversations? 13 A I have had various conversations with him since 14 he gave his deposition. 15 Q He has given two depositions. Do you recall 16 whether you spoke to him after the first one? The first 17 one was in, I believe September of 2010, and the second one 18 was in September of 2011? 19 A I think I have had communications with him about 20 his depositions sometime in between, after his first 21 deposition and sometime after his second deposition. 22 Q And what did you discuss with your brother about 23 his deposition? 24 A Among other things we discussed the tone or the 25 style of the inquiry. 13 1 Q What was the style of the inquiry, how did he 2 describe it? 3 A He provided numerous descriptions about it, 4 among which was that he felt, he expressed the idea that he 5 felt comfortable in his position. 6 Q Did he describe the questioning as friendly 7 questioning or hostile questioning, either of those? 8 A I don't believe, I don't recall him using either 9 term. 10 Q Did he indicate whether or not he felt 11 comfortable answering the questions, or that he was able to 12 understand the questions and answer them? 13 A I don't recall whether that was specifically 14 discussed. 15 Q Did you discuss -- did you ever at any point did 16 you talk about his recollection of events that were 17 discussed in the deposition versus your recollection of 18 events? 19 A I don't believe so. 20 Q Have you ever discussed with your brother 21 whether, not simply in the context of his deposition, his 22 recollection of specific historical events versus yours, 23 pertaining to the Powhatan or the Huntrising Energy Fund? 24 You are looking confused, is the question 25 confusing you? I will try to rephrase it? 14 1 A No need, just thinking. 2 MR. McSWAIN: Would it help to put a timeframe 3 on it? 4 BY MR. TABACKMAN: 5 Q I am comfortable doing that. I am talking about 6 your context of your dealings with Alan Chen between 2008 7 and 2010, roughly May of 2008 to September or the end of 8 2010. 9 MR. McSWAIN: Are you asking whether he had 10 conversations with his brother after the FERC investigation 11 started about the events of 2008 to -- 12 BY MR. TABACKMAN: 13 Q I am sorry, yes, since the FERC investigation 14 started have you had conversations with your brother about 15 events where you have talked about your various 16 recollections of things that had occurred in connection 17 with the matters that are under investigation? 18 A I believe so. 19 Q What is your recollection, will you describe the 20 discussions that you believe you may have had? 21 A Kevin has spent time describing information that 22 has come out since the FERC investigation has been 23 underway, and his he has explained to me reasons why he 24 feels comfortable in our position, both at that time and 25 currently, and why we are proceeding with the course of 15 1 action that we are as a defense. 2 Q And why -- I'm sorry. 3 MR. McSWAIN: If I could jump in, I just want to 4 remind you, make sure that you don't divulge any privileged 5 information or any discussions that you and I have had or 6 that involve attorneys. 7 THE WITNESS: I understand. 8 BY MR. TABACKMAN: 9 Q Just in conversations with you and your brother 10 why has he told you he feels comfortable with his position? 11 A Without divulging any of the legal reasons why, 12 or our defense, he just feels that we are right. 13 Q In what respect? 14 A That our actions were legal and appropriate. 15 Q Which actions is he talking about? 16 A Our actions as an investor in our dealings with 17 Alan Chen. 18 Q And without divulging anything that your lawyers 19 have said, what has your brother said to you about why he 20 believes that his actions were appropriate with respect to 21 Alan Chen? 22 A It is hard to articulate why without touching on 23 any of the legal arguments because it seems like that is 24 the center of this case, but he feels confident in our 25 position and our engagement with Alan and the counsel that 16 1 we have hired. 2 Q Did you have a position or a view on that matter 3 before your conversation with him? 4 A Yes. 5 Q Was it the same as his or different than he 6 expressed to you? 7 A I have always felt that we have done, that we 8 were in a good position in this case. So to answer your 9 question, the same. 10 Q What is your understanding of what this case is 11 about when you say you are in a good position? 12 MR. McSWAIN: You can answer that without 13 getting into privileged matters, repeating things that I 14 have told you or anything like that. 15 BY MR. TABACKMAN: 16 Q Yes, what is your understanding? 17 A In the introduction that you gave you said you 18 were doing investigation about the market participants in, 19 that are regulated by FERC. 20 Q And the market participants that are being 21 investigated, what is your understanding of the conduct 22 that is being investigated as it pertains to you? 23 A Market manipulation. 24 Q And in what respect? 25 A I don't know. 17 1 Q Did your brother have an idea, did your brother 2 have a better idea of what conduct was being investigated? 3 A I don't know. 4 Q Did he ever express to you a description of what 5 he thought was being investigated? 6 A I don't understand the question. 7 Q By the way, you and your brother are twins; is 8 that correct? 9 A Yes. 10 Q And would you describe your relationship as a 11 close one? 12 A Yes. 13 Q Let's move away from that, and maybe we will 14 come back. How are you employed? 15 A I work for TFS Capital. 16 Q What is TFS Capital? 17 A Investment advisory firm. 18 Q And what is your position at TFS Capital? 19 A I am a portfolio manager. 20 Q And are you, do you have an ownership interest 21 in TFS capital? 22 A I do. 23 Q What is the nature of that ownership interest? 24 A I am a part owner of TFS Capital. 25 Q And who are the other owners of TFS Capital? 18 1 A Kevin Gates, Larry Eiben, Eric Newman, and Chao 2 Chen. 3 Q And do you all have an equal share of the 4 ownership interest? 5 A No. 6 Q How much of the ownership interest do you have? 7 A Roughly a quarter. 8 Q And how about Kevin Gates? 9 A Roughly one-quarter. 10 Q And Larry Eiben? 11 A Roughly one-quarter. 12 Q And Chao Chen? 13 A Roughly 15 percent. 14 Q And you said Mr. Newman; that was the person? 15 A Yes. 16 Q What is his interest? 17 A Roughly ten percent. 18 Q And can you describe the work you do as a 19 portfolio manager? 20 A We are a quantitative firm, which means that 21 where rely on computers and automated systems, and our 22 objective is to provide our clients favorable risk adjusted 23 returns. 24 Q And do you have a, an area in the marketplace 25 that you concentrate on, small capital firms, large 19 1 capital, what kinds of investments, do you have a 2 special -- is the fund specialized in any way? 3 A Almost exclusively U.S. traded securities. 4 Q I take it these are all publicly traded 5 companies that you invest in on behalf of your clients, 6 your clients invest in? 7 A Yes, publicly traded securities. 8 Q And how long have you been doing that? 9 A Since 1997. 10 Q And did you have any training that you went 11 through for that, educational training or other, post 12 training -- strike that. 13 Let's start from the beginning. What is your 14 educational background, could you tell me how far in school 15 you went? 16 A I have a Bachelor's Degree in Chemical 17 Engineering. 18 Q From where? 19 A The University of Virginia. 20 Q We have one thing in common. And when did you 21 graduate there? 22 A 1994. 23 Q And have you worked as a chemical engineer since 24 you graduated from college? 25 A No. 20 1 Q And what was your first job when you left, got 2 out of college? 3 A I worked for capital One Financial Corporation. 4 Q What was your job there? 5 A I was an analyst. 6 Q What does an analyst do or what did you do as an 7 analyst at Capital One? 8 A I had a wide spectrum of projects, including 9 analyzing operational efficiency, marketing programs. 10 Q Was this in the context of investments, whether 11 or not to invest in these companies that you were 12 analyzing? 13 A No. 14 Q What was the purpose of your analysis? 15 A It was to support the credit card business of 16 Capital One. 17 Q And how long did you work there? 18 A Two years. 19 Q And what did you do after that? 20 A I worked as a consultant at American Management 21 Systems for a short period of time. 22 Q What was the nature of your work there? 23 A Consulting, technology consulting. 24 Q And when did you first become a portfolio 25 manager? 21 1 A I believe 2001. 2 Q And was TFS Capital the first firm that you were 3 a portfolio manager at? 4 A Yes. 5 Q Between American Management Systems and the 6 opening of TFS Capital where did you work, if anywhere? 7 A I had a very short stint at a credit union as an 8 analyst as well. 9 Q Am I recalling correctly, you said TFS Capital 10 started in 1997? 11 A Correct. 12 Q And did you have a position at TFS Capital at 13 its founding, when it started? 14 A Yes. 15 Q What was that? 16 A Investment advisor. 17 Q Is that different than a portfolio manager? 18 A I believe so. 19 Q Could you describe the difference, please? 20 A I believe a portfolio manager's responsibility 21 is for overseeing a specific portfolio or fund. 22 Q And what does an advisor do? 23 A An advisor can have various, encompasses a 24 various range of job descriptions, for me it meant managing 25 individual accounts. 22 1 Q And were -- were you one of the founders of TFS 2 Capital? 3 A Yes. 4 Q Who were the other founders? 5 A Kevin Gates and Larry Eiben. 6 Q When did Chao Chen become involved, become a 7 part owner of TFS Capital? 8 A Roughly 2005. 9 Q When did Mr. Newman become a part owner of TFS 10 Capital? 11 A In or around 2004. 12 Q Did you have any training, attend any classes or 13 undertake any training to be an advisor, either before or 14 after college, or during college at any time? 15 A Could you repeat the question? 16 Q Have you had, taken any courses or engaged in 17 any study, formal, other than just reading, to become an 18 advisor? 19 A Yes. 20 Q Could you describe that, please? 21 A There were various exams that were required by 22 the State of Virginia to be a registered investment 23 advisor. I forget the exact description, but they were 24 exams or tests that had to be taken. 25 Q And what kinds of subjects were you examined on 23 1 these tests? 2 A Well, the rules and regulations. 3 Q Pertaining to what? 4 A To the work as an investment advisor. 5 Q Did you have to understand the laws, for 6 example, of the Securities and Exchange Commission, was 7 that one of the things that the examination inquired into? 8 A I believe the exam discussed some of the laws 9 and regulations. 10 Q What other things did the exam discuss other 11 than laws and regulations? 12 A I don't believe anything. 13 Q Why did you start TFS Capital? 14 A To manage money for outside investors. 15 Q And had you had any particular training in 16 managing money for investors? 17 A No. 18 Q What made, did you -- how did you go and find 19 investors to manage money for? 20 A During what time? 21 Q When you, at the outset of your firm, at TFS 22 Capital? 23 A In 1997? 24 Q And then ongoing, let's start in 1997; when you 25 started your firm how did you get people to give you money 24 1 to invest for them? 2 MR. McSWAIN: In other words, how did you get 3 the business started. 4 BY MR. TABACKMAN: 5 Q Yes, how did you get the business started? I am 6 not looking for anything complicated, how did you start the 7 business, who -- what did you do? 8 A We had attracted clients through a number of 9 ways, number of avenues. 10 Q Such as -- I am sorry? 11 A Primarily word of mouth. We at some point in 12 the first several years of our business, and I forget 13 exactly when, we mailed out postcards to attract clients, 14 we had some exposure in the media, and we launched a 15 website at some point in time as well. 16 Q What were the qualities that you had or that you 17 marketed to these people to say that you were going to be a 18 good investment advisor? 19 A We had skills in analysis and approaching the 20 markets with a logical, rational mindset, with the 21 objective of helping clients, of marketing returns or 22 products that we thought would be beneficial to them. 23 Q Did you have to have any particular skill or did 24 you acquire the skill of assessing the risk of particular 25 investments, one investment versus another? 25 1 A Could you repeat the question. 2 Q Was risk assessment one of the requirements for 3 your job? 4 A Yes. 5 Q And was it an important requirement? 6 A It was important us, but I believe it should be 7 important to all managers of money. 8 Q What tools would you use in doing, undertaking 9 risk assessment for investments that you were considering? 10 MR. McSWAIN: Can you clarify what time period, 11 are you still talk about in the beginning? 12 BY MR. TABACKMAN: 13 Q This is in 1997 at your founding, and if it has 14 changed can you also describe that, please? 15 A We have always -- we have used technology. 16 Q What does that mean? 17 A We have used technology, which I would describe 18 as computer software programs to evaluate investment 19 strategies to try to quantify returns, risk profiles of the 20 strategies, and we would compare them to other investment 21 opportunities that exist. 22 We also, since the onset of our business, have 23 spent -- understand that there are, we have spent a lot of 24 money with legal counsel making sure that our investments 25 also fit a, were within -- had limited risk or negligible 26 1 or no risk characteristics, from a regulatory standpoint as 2 well. 3 Q Did you focus on any particular kind of 4 clientele, and by that I mean high net worth individuals, 5 or just the broad populace at large when you started your 6 business? 7 A The broad populace at large, but if they had any 8 characteristic in common it was that they were 9 sophisticated, where they were analytical, logical, 10 rational, and that doesn't necessarily mean that they were 11 high net worth. 12 Q And would you describe yourself as 13 sophisticated, logical and rational? 14 MR. McSWAIN: Or humble? 15 THE WITNESS: I try to be. 16 BY MR. TABACKMAN: 17 Q I take it the qualities that you felt qualified 18 you to be an investment advisor, are those the same 19 qualities that you look for when you are investing your 20 money, your own money? 21 A Yes. 22 Q How do you go about assessing that? 23 A How do -- could you repeat the question, please? 24 Q How have you gone about, in the cases where you 25 have had to invest your money, gone about assessing whether 27 1 or not the potential advisor, if you will, is sufficiently 2 sophisticated, logical, rational, the qualities that you 3 described? 4 A When I have invested money with outside managers 5 I try to have some understanding of their experience, their 6 integrity, their ability to solve problems. 7 Q TFS Capital, is that the -- strike that. 8 Are there a number of different funds that have 9 been a part or underneath TFS Capital in the years between 10 1997 and now? 11 A A number meaning greater than one? 12 Q Yes, could you tell me what kinds of funds, I 13 know that I have heard there has been the Huntrise Energy 14 Fund, for example. I have heard of Huntrise Fund of Funds, 15 I am trying to understand it is that those various, how 16 many of those kind of funds have there been and how has it 17 been that you decide to have one type, these various funds, 18 do they serve different purposes? 19 A We currently have five funds that we manage that 20 are open for client money. 21 Q What are the names -- I am sorry? 22 A Some of those funds have been open since 2001, 23 including Huntrise Global Partners, Ltd, Huntrise Capital 24 Partners, LLC; and three mutual funds that are registered 25 with the SEC. 28 1 Q What are the names of those? 2 A TFS Market Neutral, TFS Small Cap, and TFS 3 Hedged Futures. TFS also has some funds that we manage for 4 internal purposes as well for our own proprietary capital. 5 Q And what are the names of those? 6 A Before answering that question I will also add 7 Oakstone Partners, LLC onto the list of funds that have 8 client investments. 9 Q Today, do all of these funds have client 10 investments today? 11 A Those six do, correct. We also have, you asked 12 me to name the funds that are open that have proprietary 13 money, I believe -- I don't know the complete list of those 14 funds that are open right now, but some include Powhatan, I 15 believe it is Powhatan Energy Fund, Huntrise Fund of Funds, 16 Penguin Lips, and Tuckahoe Energy Fund. 17 Q Are there proprietary funds that have been 18 existence at one time since the founding of TFS Capital 19 that are no longer in existence? 20 A Yes. 21 Q Could you give me the names of those, please? 22 A I cannot give you a complete list of those. 23 Q To the best of your recollection at this point. 24 Let me ask you this first, how many are we talking about 25 roughly, what order of magnitude, ten, 20, proprietary 29 1 funds now? 2 A I would speculate that it has been less than 3 five incremental funds have been set up for proprietary 4 investment. 5 Q You gave me the name of Powhatan, Huntrise Fund 6 of Funds, Penguin Lips, Tuckahoe Fund, that is four; are 7 you saying that there are five others, perhaps? 8 A I speculated that there is five or fewer 9 incremental funds. 10 Q What do you mean by five or fewer incremental 11 funds? 12 A You named a handful of funds that you copied 13 down often your paper, and I am suggesting that I think 14 there, if we went back since the beginning of TFS to look 15 at the proprietary funds that have been established, that 16 there may only be somewhere between one to five incremental 17 funds. 18 Q One to five other additional funds? 19 A Above and beyond the names that you have written 20 down that I articulated earlier. 21 Q I am trying to understand what the use of the 22 word incremental in this context meant. 23 When did you first become involved in or have an 24 interest in energy trading or having an energy-related 25 fund? 30 1 A I would speculate sometime between 2007 and 2 2008. 3 Q You said you are you speculate. When you use 4 speculate in that context what does that mean? 5 A It might have been 2005, 2006, or even prior. 6 Q And did you discuss your interest -- strike 7 that. 8 What do you recall about the, how your interest 9 was sparked, what started you to become interested in 10 energy funds? I am not trying to make this tricky, 11 Mr. Gates, did you talk about it with your brother, did you 12 talk about it with Larry Eiben, is this something you were 13 working on sparked your interest? I am just trying to find 14 out how you got interested in energy funds? 15 A I understand that, I am thinking about it so I 16 can provide you a good answer that you deserve. 17 Q Fine. 18 A I believe our interest in energy was sparked by 19 a communication that we had with a participant in the 20 market, in the energy trading market. 21 Q You said we, who are the we that you referred 22 to? 23 A TFS, the owners of TFS. 24 Q Do you recall, were you the person who got, who 25 first raised the possibility of an energy fund, was it 31 1 Mr. Eiben, was it your brother Kevin, was it somebody else? 2 A It was not me, but I don't remember, don't 3 recall who had the first idea to pursue this type of 4 investment. 5 Q And do you recall from whom the communication 6 came that you referred to? 7 A I do not. 8 Q Do you recall the nature or the subject matter 9 of the communication other than that it involved energy? 10 A I don't recall the specifics, but I will 11 speculate that the idea was presented to us that energy 12 markets provided, could provide the opportunity for 13 producing favorable risk adjusted returns. 14 Q And was there any particular aspect of the 15 energy market, by that I mean was it electricity, natural 16 gas, petroleum, can you say, was there any specifics in the 17 communication in terms of the subject area? 18 A I don't recall. 19 Q Do you recall what TFS did, went about deciding 20 whether or not to pursue an interest in an energy fund? 21 A I do not. 22 MR. McSWAIN: When you say TFS are you referring 23 to owners of TFS investing their own money? 24 BY MR. TABACKMAN: 25 Q Well, I guess let me explore that. When the 32 1 interest in an energy fund, have you -- was that a public 2 fund or a proprietary fund that, or I am sorry, strike 3 that. 4 The interest in the energy market as an 5 investment, was that initially an interest for proprietary 6 purposes or for trying to set up a fund in the energy 7 market that would be open to the public? 8 A Our initial interest was probably for both, for 9 personal investments with a long term objective of managing 10 money for outside investors. 11 Q And have you ever, have you personally ever 12 managed money for outside investors in the energy market? 13 A No. 14 Q Has Mr. Eiben ever done that, so far as you 15 know? 16 A I don't believe so. 17 Q How about your brother Kevin? 18 A No. 19 Q How about Chao Chen? 20 A No. 21 Q How about Mr. Newman? 22 A No. 23 Q By the way, who is Mike Frederick or Fredericks? 24 A He is a business partner of ours. 25 Q What is his business? 33 1 A He works for TFS Capital. 2 Q What does he, what is -- is he an employee of 3 TFS Capital? 4 A He is an employee. He is -- has a pseudo equity 5 grant, so I do not describe him or Greg Sekelsky, who will 6 be in here later today, or Sam Harris as owners of the 7 business, but their compensation is comparable to being an 8 owner of the business, but technically I believe he is an 9 employee. 10 Q So they are -- how are they compensated? 11 A By the profitability of TFS. 12 Q And do they perform -- what services does 13 Mr. Frederick perform for TFS? 14 A His work primarily focuses on marketing and 15 distribution. 16 Q And what -- does he focus on any of the 17 particular funds that TFS has, or -- when you say marketing 18 and distribution, what does he do? 19 A He meets investors and prospective investors. 20 Q And in what context? 21 A The investors, he meets to discuss their 22 investments with our firm, prospective investors, he meets 23 with them to discuss their investment, future allocation 24 decisions or investment decisions. 25 Q And how does he go about finding prospective 34 1 investors? 2 A He has a number of methodologies, none of which 3 are particularly unique to TFS Capital. 4 Q Such as? 5 A Such as attending conferences, such as 6 contacting people that he, old relationships that he has 7 had and developed through the years, such as fielding 8 inquiries that are placed into our firm from prospective 9 investors, and also referrals from contacts that our firm 10 has made. 11 Q Let's talk about the kind of tasks that you do 12 on a daily basis or as part of your work. Could you 13 describe what the nature is of the portfolio management, is 14 it connected to any one of the public funds that you named? 15 A I am a portfolio manager of all three of the 40 16 Act listed mutual funds, as well as the hedge funds that 17 were described earlier. My role is to oversee investment 18 decisions, back testing, review back testing, I shouldn't 19 say oversee it but to review back testing, and oversee the 20 implementation of the strategies. 21 Q What is back testing? 22 A Back testing is a technical industry term that 23 is used to describe generating computer simulated analysis 24 on large data sets to help us determine what sort of risk 25 adjusted returns could be produced from a given strategy. 35 1 Q And what, do you have a particular strategy that 2 you employ in your portfolio management? 3 A I don't understand the question. 4 Q You said that back testing involves simulating 5 risk adjusted returns, seeing whether a certain strategy 6 would produce favorable risk adjusted returns, and so I am 7 asking you what kind of strategies do you employ, do you 8 have particular ones that you use in terms of making your 9 portfolio or investment decisions or recommendations? 10 A When you say you, do you mean you as Rich Gates 11 or you as TFS Capital? 12 Q Let's start with you as Rich Gates? 13 A No. 14 Q How about as TFS Capital? 15 A Yes, our firm -- 16 Q Go ahead. 17 A Our firm is, has a group portfolio management 18 decision, so decisions and allocations and investment 19 decisions are made by a group. 20 Q Who is part of that group, who are the members 21 of that group? 22 A Kevin Gates, Chao Chen, Eric Newman, Larry 23 Eiben, and Yan Liu. 24 Q You will need to spell that last one, probably. 25 A Y-a-n, L-i-u, and Chao Chen and Liu are Ph.D's. 36 1 Q And Yan Liu is, what is the relationship of Yan 2 Liu to TFS Capital, is it like Mr. Frederick and Mr. Harris 3 that you described? 4 A No. 5 Q How is Yan Liu compensated? 6 A He is an employee. Who is a -- his 7 compensation, while tied to the profitability of TFS is 8 not, I don't believe solely determined by that. 9 Q Does that mean that a person has a salary in 10 addition to some participation in the profitability? 11 A Something similar to that. 12 Q Let's get back to the decision to get involved 13 in the energy market. After this initial communication 14 what do you remember happening? I am sorry, you said it 15 may have been someone -- I forget when you said that you 16 thought that communication had come, I believe you said 17 maybe 2007 or 2008, but possibly 2005 or 2006? 18 A Or even prior, correct. 19 Q What happened after that initial communication? 20 A I have a very vague recollection of the events 21 that took place that led us to pursue investment decisions 22 in energy, I can't even recall what year it took place or 23 within a year or two window of when it took place. 24 Q I understand. Your vague recollection, I mean 25 would there be things that you would typically do to make a 37 1 decision as to whether or not to invest? 2 A Yes. 3 Q And is there a reason to believe that in 4 deciding whether to invest in the energy fund you did 5 something other than what you would typically do? 6 A We generally follow a sort of process to 7 evaluate outside investments, but this, I believe there 8 are, probably are some unique characteristics about energy 9 because it was so foreign to us that we my have behaved 10 differently than what you would characterize as our normal 11 evaluation process. 12 Q Okay. Understanding that, what is your normal 13 evaluation process, what does that involve, what kinds of 14 activity, what kinds of things do you look at to invest? 15 A Our normal evaluation process is not 16 particularly structured. This is a small, relatively small 17 part of our job and our efforts. The primary focus of our 18 time and our energies and resources are devoted to our 19 existing funds. But to describe a process to evaluate 20 outside managers it would include research, evaluating 21 historical returns that have been produced, trying to do 22 some level of due diligence, which may include talking to 23 auditors, existing investors, managers. In the past I 24 believe we have done background checks on outside managers. 25 We have met to discuss potential, their investment 38 1 strategy. 2 Q In the history of TFS Capital how many outside 3 managers have you employed or used either for the purposes 4 of proprietary investment or nor the public investment, 5 hedge funds, or the 40 Act companies, Investment Company 6 Act. 7 MR. McSWAIN: I was going to say, would an 8 approximation -- 9 BY MR. TABACKMAN: 10 Q Sure. 11 A I would guesstimate more than 200. 12 Q Your funds have used more than 200 outside 13 managers? 14 A I will clarify that, more than 200 outside 15 investment funds. 16 Q Was Alan Chen an outside investment manager, as 17 you use that term? 18 A He was an outside manager for proprietary funds. 19 Our registered mutual funds invest in a large portfolio of 20 closed end funds, ETF's, ETN's, other registered investment 21 companies that are managed by outside managers, and that -- 22 those investments are a very, very different process, go 23 through a very different process than we employ for these 24 other investments such as Alan's. 25 Q Okay. Let's then describe, for people like 39 1 Alan, and equivalent of Alan Chen, how many of those kind 2 of outside managers have you used? 3 A Could you rephrase the question, please? 4 Q How many outside managers have you used as you, 5 that fulfilled the function similar to that or analogous to 6 that of Alan Chen in the energy field? 7 A Are you asking me how many outside managers we 8 have had trading energy for us? 9 Q In different areas, but you drew a distinction 10 between choosing outside managers that are investing on 11 behalf of some other fund that you are then participating 12 in, and people like Alan Chen. I believe that was a 13 distinction that you drew, so I am trying to find out how 14 many people fall into the category of Alan Chen in whatever 15 market they may have been involved? 16 MR. McSWAIN: Now I am a little unclear, let me 17 try to be helpful, if I can. Are you asking Mr. Gates how 18 many outside advisors he has used for his proprietary 19 investments -- 20 MR. TABACKMAN: Right. 21 MR. McSWAIN: -- versus the TFS investments? 22 BY MR. TABACKMAN: 23 Q Let's start with that. 24 A Could you rephrase the question for me, please? 25 (The reporter read the record as requested.) 40 1 BY MR. TABACKMAN: 2 Q I will rephrase it. Have you employed outside 3 managers in the management of the proprietary funds? 4 A Yes. 5 Q How many? 6 A I would speculate more than 200. 7 Q And when you say speculate, what does that mean? 8 A I don't know for sure. 9 Q Is that your best recollection or is it a number 10 that you picked out of the air? 11 A It is not a number I picked out of the air. I 12 would say I didn't know, so it is some sort of informed 13 estimate, but it is just that, an estimate. 14 Q Okay. And if you were to give a range that you 15 were comfortable with as opposed to a precise number, it is 16 somewhere between X and Y; what would those two numbers be? 17 A I don't understand the question. 18 Q Since 200, you said you have no specific 19 recollection, I am trying to find out what would be the 20 high and low end of the range of numbers that you are 21 thinking of in terms of outside managers? 22 A I would guesstimate there is a 98 percent chance 23 it is in between 10 and 400. 24 Q Let's talk about the ones that you recall then, 25 because we have all the time in the world. 41 1 MR. McSWAIN: Do you want him to name some that 2 he recalls? 3 BY MR. TABACKMAN: 4 Q Sure. 5 A We have had some funds that have taken buy and 6 hold positions in a number of registered funds such as 7 closed end funds, ETF's, ETN's and other registered 8 investment companies. 9 Q And these are for proprietary purposes? 10 A That is correct, I believe that is correct, and 11 that is where a lot of the uncertainty comes from. 12 Q When you, when TFS, and when I use you I am 13 generally referring to TFS, and if I am referring to you 14 personally I will make that clear, okay, as a ground rule. 15 When TFS began to consider investing in an 16 energy, into the energy market, how did it, what process, 17 what did it do to make, to reach a decision, what steps did 18 it take? 19 A The steps that it took were probably similar to 20 the investment, other investment decision that is we made 21 to invest in outside managers who were not offering 22 registered products. But I did mention earlier that there 23 were probably some things that were unique or relatively 24 unique to this evaluation and others. 25 Q What, can you recall what some of those unique 42 1 factors would be, or steps that you would take would be in 2 the energy markets? 3 A I believe there was a list, publicly available 4 list of all registered participants, investors or something 5 like that, in the energy market that is not available in 6 other markets that we have evaluated in the past. So one 7 thing that would be unique is I believe we went through 8 that list and called managers. 9 Q Was there a focus on any particular region of 10 the country or market, organized market that you focused 11 on? 12 A I have heard the term PJM and MISO and there was 13 something I believe up in New York as well. I don't know 14 whether we -- the answer to your question is I don't 15 recall, but at some point we became aware of certain areas, 16 I guess unique exchanges or markets, and at some point 17 during the process I believe we may, I will speculate that 18 we may have contacted managers who were investing in those 19 regions. 20 Q When you say you speculate, that is based upon 21 your best recollection of what would have probably been 22 done to find managers? 23 A Yes. 24 Q Was there one person at TFS who was more active 25 in this effort than the other owners of TFS? 43 1 A Which effort is that? 2 Q The effort to find an outside manager to 3 evaluate outside managers for investing in the energy 4 market? 5 A Yes. 6 Q Who was that? 7 A I believe Kevin Gates and Larry Eiben spent more 8 of their time and resources evaluating this potential 9 investment than others at TFS. 10 Q And what do you recall, did they come to you 11 with a recommendation at some point, you personally, with a 12 recommendation that TFS should do, take some particular 13 action to begin to engage itself in the energy market? 14 A Yes. At some point in time they provided 15 guidance or feedback that I think it is fair to describe 16 would be recommendations. 17 Q And what do you recall that consisting of? 18 A There was a wide range of what I would describe 19 as recommendations that they made. Such things, such 20 recommendations would include contacting the list of the 21 managers that I mentioned earlier that was publicly 22 available. We had an individual who worked directly for 23 TFS that was pursuing investment -- power trading, so they 24 gave a recommendation I believe to hire this individual and 25 to set this individual up with the ability to make 44 1 investments. They made recommendations to pursue 2 relationships such as those with Alan Chen. 3 Q And who was the person that was the employee 4 that was set up to do trading? 5 A His name was Krishna, and I am drawing a blank 6 on his last name. I believe he worked for us for roughly 7 12 months. 8 Q And did you, when you decided to give that 9 person the power, the ability to trade, did you invest -- 10 how much of your money, did you invest your money as part 11 of the money that that person was going to be using to make 12 investments in the energy market? 13 A I believe so. 14 Q What is your best recollection as to how much 15 money you personal lip personally invested at that time? 16 A With Krishna? 17 Q Yes. 18 A I don't recall. 19 Q Can you give an approximate number, amount? 20 A Roughly, if I invested I would speculate that it 21 was about $50,000. 22 Q You don't know whether you invested any money to 23 Krishna -- 24 A Krishna. 25 Q Yes. 45 1 A I am not 100 percent sure. 2 Q How sure are you? 3 A 95 percent sure. 4 Q And when there came a -- sorry. When you 5 decided to set up Mr. Chen or engage Mr. Chen as an outside 6 manager, what -- strike that. 7 Was he evaluated versus other potential outside 8 managers or was he a name that you evaluated in and of 9 itself and looked at him? Did you look at three 10 possibilities is what I am trying to get at, and say okay, 11 this is the best one, or did you just look at Mr. Chen and 12 say he is fine, he looks good to us? 13 A I believe we first made contact with Alan by 14 going through this publicly available list of managers or 15 registered participants in the market. I do not know the 16 length of that list or how many contacts were made, but I 17 believe that is how we first came in contact with Allen 18 Chen. 19 MR. McSWAIN: Can we take a five-minute break or 20 do you have a couple questions? Is it okay -- 21 MR. TABACKMAN: That is fine, we are going to 22 move into Chen now, so why don't we go off the record. 23 Let's go off the record for a few minutes. 24 (10:45 a.m. -- recess -- 10:56 a.m.) 25 BY MR. TABACKMAN: 46 1 Q Can we go back on the record. You are still 2 under oath, Mr. Gates; do you understand that? 3 A Yes. 4 Q Good, okay. Mr. Chen, how much of your personal 5 money did you invest with Mr. Chen at the outset of your 6 relationship between him and TFS Capital? 7 A I will respond to the question to mean, you mean 8 Alan Chen as opposed to Chao Chen? 9 Q I am sorry, I meant Alan Chen, yes. 10 A I don't recall specifically, but if I had to 11 speculate I would say $50,000. 12 Q Are you 95 percent certain about that? 13 A No, lower degree of certainty on that one. 14 Q Can you give my an approximation on your degree 15 of certainty? 16 A I would say there is an 80 percent chance it was 17 somewhere between $25,000 and $200,000. 18 Q And you have no idea closer than that where, 19 which end of that, that is a wide range? 20 A It is a wide range. I would guess it is on the 21 lower end, closer to the $50,000, somewhere in there. 22 Q And did there come a time when you invested 23 additional money after that first time with Alan Chen, 24 after the first initial investment? 25 A I believe so. 47 1 Q And do you recall approximately how much money? 2 A I don't. 3 Q You have no, you can't give any approximation at 4 all? 5 A I would speculate that I may have doubled or 6 tripled the size of my investment with Alan. 7 Q Okay. Let's go back then to the beginning. 8 There was this, you said this process of reviewing names of 9 participants in the market, did you, do you recall -- 10 strike that. 11 The decision to engage in outside managers such 12 as Alan Chen, is that a decision that is reached by 13 consensus of the owners of TFS, is it by majority, how -- 14 A It is an investment that was made by these 15 outside entities, not by TFS. The outside entities, their 16 ownership was separate and different from the ownership of 17 TFS. 18 Q Who made the initial, what entity made the 19 initial investment with Alan Chen? 20 A I don't know for sure, but I believe Huntrise 21 Energy Fund had an investment with Alan before Powhatan 22 Energy Fund. 23 Q And is Huntrise Energy Fund a proprietary fund? 24 A Yes. 25 Q Who are the people who own or participate in the 48 1 Huntrise Energy Fund? 2 A I don't recall. 3 Q Was Larry Eiben one of them? 4 A I believe so. 5 Q Was Kevin Gates one of them? 6 A I believe so, but I would like to clarify that 7 it might have been Kevin Gates or members of his household, 8 and the same thing for Larry Eiben as well, sometimes 9 members of his household would make these investments. 10 Q How is Huntrise Energy Fund set up for making 11 investments, I mean does each of you decide individually 12 how much you want to, want to invest in to the fund and 13 then the funds makes, decides how much to invest with an 14 outside manager; how does that work, or how did it work in 15 this instance to the best of your recollection? 16 A My recollection is that Larry and/or Kevin found 17 an opportunity to, for an investment that they thought 18 might generate favorable risk adjusted returns, and 19 communicated it to the members or investors in one of these 20 outside funds, and somehow a decision, a consensus, some 21 sorts of decision was made by the investors to pursue the 22 investment. 23 Q And when we talk about the investors we are 24 talking about the investors in Huntrise Energy Fund? 25 A Or Powhatan Energy Fund or any other fund that 49 1 may have invested with Alan prior. 2 Q And I don't know if this is the correct term or 3 not, but is there a subscription that each of you, each of 4 the owners of the fund or people want to participate would 5 have to make in terms of amount of money? Do you go to 6 this guy and say I want to invest 15,000 and Kevin can say 7 I want 25,000, that is what I am try to get at? 8 A Investors could invest different amounts of 9 money. 10 Q In the proprietary funds that you had and that 11 you participated in with your brother and Larry Eiben, has 12 in been more than one? 13 A I am sorry, could you rephrase the question. 14 Q Have you and Larry Eiben and your brother been 15 owners or participants in more than one proprietary fund 16 together? 17 A Yes. 18 Q And is there a practice that you have followed 19 in making your individual investments in those proprietary 20 funds, such as everybody invests the same amount or varying 21 amounts? 22 A I believe there have been times when we have 23 invested different amounts, depending on our objectives or 24 our own personal opinions on the investment. I believe 25 there have been many times where we have all gone in and 50 1 said we will do this together at similar, identical or 2 similar sort of dollar amounts. 3 Q Okay. And do you have a recollection as to how 4 it worked out with Mr. Chen, Dr. Chen, Alan Chen at the 5 outset of the decision to invest with him? 6 A I don't recall specifically. 7 Q Did anybody, do you rule if someone did an 8 assessment as to a certain minimum amount of money that 9 needed to be invested to actually get, you know, a 10 reasonably good returns in this market? 11 A Yes, I think that is a standard practice for, or 12 the type of question or issue that an outside manager would 13 deal with, particularly when dealing with an outside 14 investment that is not a registered product like a closed 15 end fund, 40 Act fund, et cetera. A lot of these managers 16 do provide some guidance and say I need X dollars to make 17 this an effective investment strategy, a minimum of X, I 18 should say. 19 Q What is your recollection in this instance as to 20 how much the, Dr. Chen was seeking or he thought would be a 21 good amount, assuming he made a recommendation? 22 A This goes back to the question you asked earlier 23 about my initial investment in the fund. My recollection 24 is hazy. I said $50,000, with the idea that maybe I put 25 in, was a 25 percent investor, my wife or I, I don't even 51 1 remember whether I invested directly. Someone in my 2 household could invest directly in this fund, and would I 3 guesstimate those numbers at $200,000 was the number that 4 I, you would end up with. 5 Q In the group? 6 A In the group, and I am assuming that I am 7 25 percent of the $200,000, so that is how I came up with 8 the $50,000 allocation initially, but I put in, if I 9 recall, a kind of error estimate around it, and that is 10 because I don't recall. And that error estimate would also 11 apply to Alan Chen's minimum investment amount. 12 Q Was a $50,000 investment for you personally or 13 for a member of your family, was that large investment for 14 you, a small investment for you, I mean in terms of the 15 financial commitment that it reflected? 16 A $50,000 is a lot of money to me. 17 Q That is what I was asking. 18 A Yes. 19 Q And when you invest, I take it that you -- that 20 at some point you did your own assessment on the 21 recommendation that Mr. Eiben or your brother was making 22 that Alan Chen was somebody to invest money with? 23 A I primarily deferred to Kevin Gates and Larry 24 Eiben on the evaluation of this market. 25 Q They gave you some data to look at? 52 1 A Yes. 2 Q And do you recall what kind of data they gave 3 you? 4 A I believe at one point I saw either actual or 5 simulated returns that Alan Chen had produced in the 6 markets over the course of his career. 7 Q And do you recall -- strike that. 8 When you decided that you would participate in 9 this investment did you regard it as a, as a particularly 10 risky investment, one where you thought you would get 11 small -- and how did you assess the risk of it in your 12 mind? 13 A I considered it -- that there is a lot of 14 unknowns to it, so because there is a lot of unknowns I 15 assumed it was a high risk investment. 16 BY MR. OWENS: 17 Q What other due diligence did you do before you 18 invested with Alan Chen? 19 MR. McSWAIN: The first time? 20 BY MR. OWENS: 21 Q The first time, you personally? 22 A What other due diligence did I do before I 23 invested with Alan Chen? 24 MR. McSWAIN: Or a member of your family. After 25 the initial approximate $50,000, or were you deferring to 53 1 others, what was going through your mind? 2 THE WITNESS: I had limited involvement in 3 making this allocation. A lot of it was based on the 4 guidance or suggestion from Kevin Gates and Larry Eiben to 5 make the investment. I had met some people who came into 6 our office and talked about the power market, so I had this 7 general sense that there was something in different market 8 out there that existed that I knew nothing about, and so a 9 lot of my -- part of the investment decision that we all 10 made was this is a new market, we would like to just learn 11 about this market. And so a lot of it, at one point of the 12 investments was just to learn. 13 BY MR. OWENS: 14 Q To your knowledge what due diligence did Kevin 15 and Larry do on Alan Chen and/or his investments? 16 A I believe that they obtained historical trading 17 results from Alan, either real-time or simulated trading 18 results. I believe they did due diligence on him, 19 background checks, if you will, on former employers, the 20 educational background, things like that to make sure that 21 he truly was the expert that we assumed he was. 22 BY MR. TABACKMAN: 23 Q Did you meet with Alan Chen before you actually 24 committed money personally, meet with him? 25 A I don't recall. 54 1 Q Have you met with him at any time? 2 A I believe I had very brief interaction with him 3 one time when he came to our office. I believe he made two 4 visits to West Chester to visit us, I believe I was in the 5 office one of those two times, I am not sure of that, 6 and -- about the time, but I do have the vague recollection 7 of maybe shaking his hand in a lobby or near the kitchen 8 and exchanging pleasantries. 9 Q Let me see if this refreshes your recollection, 10 do you recall having a meeting, you yourself, with a 11 producer or I believe from 60 Minutes? 12 A Yes. 13 Q And was Dr. Chen meeting at West Chester on the 14 same day, does that ring any bells with you, refresh your 15 recollection as to perhaps the time you met with him? 16 A That could have been the day that I met him and 17 exchanged pleasantries. It also is possible that I was not 18 in fact at the office the one day that he came and instead 19 I was tied up with other activities. 20 Q But does that mean that you have never had a 21 discussion between yourself and Alan Chen, among -- even 22 including other participants, about the investments that he 23 is making on behalf of the funds that he has invested, that 24 he has had money from? 25 A That is correct. 55 1 Q And I take it you relied on your brother or as 2 the relationship developed, what did you do to satisfy 3 yourself that this was an investment that you wanted to 4 continue to participate in, or to make? 5 A There are probably a number of factors that I 6 looked at to decide to continue to invest monies with Alan 7 Chen. They would include such things as recommendations or 8 guidance provided by Kevin Gates and/or Larry Eiben, my 9 evaluation of the risk adjusted returns that Alan was 10 producing, and the idea that we are, our firm wanted to 11 evaluate new markets to explore them for our own purposes. 12 Q I am sorry, can you explain that, what does that 13 last part mean? 14 A We always had this idea that we would, that one 15 of the advantages of investing personal monies, that 16 Powhatan would invest in outside managed -- managers, was 17 that we would gain some understanding of those markets such 18 that we could then take those learnings to our jobs at TFS 19 Capital and derive further value. 20 Q What was your understanding at the outset of 21 this kinds of investments, the kinds of trades, if you 22 will, that Alan Chen was doing in the energy market? 23 A I had a very limited understanding of his 24 specific trades that he was making. I do recall being 25 aware sometime early on in the relationship with Alan that 56 1 summer and winter were good times for his investment 2 strategy because of power demands change, either increased 3 volumes or something along those lines. So I do recall 4 that that was something that we considered. 5 Either with Alan or other managers that we were 6 communicating with, I guess I should, I should clarify that 7 I don't recall that specific concept with Alan, but it was 8 a concept that I was aware of as Kevin and Larry were 9 evaluating these outside managers. 10 Q Did you as a group consider other markets other 11 than the electricity market as an energy investment, do you 12 recall whether there were discussions about that? 13 A Can you rephrase the question? 14 Q Do you recall whether you and the others, and 15 Kevin Gates, Larry Eiben, considered, and when you went 16 into the energy market, an investment in a sector of the 17 market other than the electricity market, is where Alan 18 Chen was trading; right? 19 A I don't recall specifically, however, during the 20 last couple of years I do, have heard of, have some how 21 become aware that there is a natural gas market, which I 22 believe is separate and distinct from the electricity 23 market that you stated that Alan was trading in. 24 I have become aware that there is a physical 25 market and a virtual market, which are apparently separate 57 1 and distinct. So I don't recall specifically whether we, I 2 became aware of these different markets or opportunities 3 from my -- as a result of us evaluating different managers, 4 but somehow we -- but I presume that might be the case. 5 Q And do you recall was there a name for the kind 6 of trades that Mr., or excuse me, Dr. Chen was doing, Alan 7 Chen? 8 A Up To Congestion was the term that I recall 9 hearing. 10 Q And do you recall from whom you first heard 11 that? 12 A No. 13 Q Would it have been either Larry Eiben or Kevin 14 Gates, can you go beyond just mere speculation as to say it 15 was probably one of or the other of those two? 16 A I can't. 17 Q Do you recall considering other kinds of trades 18 in the electricity market, whether there was an evaluation 19 of whether Up To Congestion trade as opposed to some other 20 form of trading in the electricity market would be one that 21 would give you satisfactory favorable risk adjusted 22 returns? 23 A Yes, I believe that I was aware that the 24 different traders that we had, including Alan Chen, were 25 effecting different types of trades, and I was aware that 58 1 they were not correlated to each other. 2 Q And do you know, how was it decided to retain, 3 if you will, an outside manager to do Up To Congestion 4 trading as opposed to some other type of electricity 5 trading? 6 A Could you repeat the question? 7 Q Do you recall -- maybe you could read it. 8 (The reporter read the record as requested.) 9 THE WITNESS: I think early on we had no idea 10 what Up To Congestion meant, that that was the type of 11 investment strategy that we wanted to focus in on. And I 12 think that our decision to invest with Alan was primarily 13 on the idea that his, he seemed to be experienced, or was 14 very experienced, was very educated, and was producing good 15 returns and were able to strike an agreement with him, an 16 investment advisor agreement with him that we thought was 17 fair to both sides. 18 At some point in the, in our involvement in the 19 electricity or power market I think we started, became 20 aware that Alan was producing returns that were better than 21 other investor, other investments that we had made and we, 22 therefore, decided to try to increase our exposure to those 23 that were performing better. 24 BY MR. TABACKMAN: 25 Q You said that one of the things that you 59 1 evaluated was the risk adjusted returns. How did you get 2 that data to make that evaluation, where did it -- how did 3 it come to you? 4 A My recollection is that Alan may have provided 5 us historical numbers of either his real-time trading 6 results or his simulated trading results. My vague 7 recollection is those numbers may be monthly numbers, which 8 is what we call monthlies, which in other words might be 9 something like in January of 2005 Alan would say I made X 10 percent; in February 2005 I made or lost Y percent, 11 et cetera, et cetera. So we would look at monthly numbers, 12 returns like that, to try to determine whether to make an 13 allocation to Alan. 14 Q After the relationship was formed did you 15 continue to review the risk adjusted returns that -- 16 A I don't believe I had a formal process, I know I 17 did not have a formal process for reviewing his returns or 18 anyone else's returns, but I was made aware on a periodic 19 basis of his performance, whether he had been making money 20 and/or losing money. I don't recall whether I was given 21 percentages, which is the way we would evaluate it, set up 22 a relationship, or just dollar amounts. 23 (R. Gates Exhibit 1 identified.) 24 BY MR. TABACKMAN: 25 Q Just take a look at that and let me know after 60 1 you have read it. 2 MR. McSWAIN: Have you read it? 3 THE WITNESS: Yes. 4 BY MR. TABACKMAN: 5 Q Have you had an opportunity to review Exhibit 1? 6 A Yes. 7 Q Do you recognize it as an e-mail that at least 8 at the top is one from you, contains -- it is an e-mail, 9 series of e-mails, some of which are from you? 10 A When you say I do recognize it, I don't 11 recognize it, but I do believe that it was an e-mail that I 12 sent, or e-mails that I sent. 13 Q Does this refresh your recollection as to 14 whether or not you regularly received daily reports of 15 Alan's daily volume and PnL? 16 A I don't believe I received daily updates on his 17 performance, the performance of my investment with Alan 18 Chen. 19 Q By the way, the subject matter is Re: PJM daily 20 volume and PnL update for 1/31/2009. Do you know whether 21 or not your brother was receiving daily updates from Alan? 22 A Kevin did receive periodic updates, and he would 23 occasionally forward them along to other investors in 24 Powhatan. And I don't know whether Kevin received daily 25 e-mails, I don't know whether he, you know, how frequently 61 1 his updates came, but I know that he received a lot more 2 updates than, I believe that he received a lot more updates 3 than he would forward along to individuals such as me. 4 BY MR. OWENS: 5 Q Was Kevin in charge of managing the relationship 6 with Alan Chen from your perspective? 7 A Yes. 8 Q Did you have any independent contact with Alan 9 Chen, that is to say, without -- not going through your 10 brother or Larry Eiben or anyone else? 11 A My only recollection of contacting or 12 communicating with Alan directly, either via e-mail, the 13 telephone or in person, was I believe I had, the experience 14 I described earlier, where I had a very short interaction 15 with him at one time when he came into our office. 16 BY MR. TABACKMAN: 17 Q You wrote here, at least it appears to be, I 18 feel like what this dude is doing is wacky good, and we 19 should devote a lot of energy, try to replicate and/or 20 finding similar capacity; what does that mean? 21 A That comment was made in relation to this 22 overall exchange, including my question earlier in the 23 communication of why can't Krishna do that, which is a 24 question I asked after Kevin forwarded the e-mail, showing 25 that Alan Chen was making a lot of money. 62 1 And Kevin asked me if that was a serious 2 question, and it was a serious question because I didn't 3 really understand, I did not understand the involvement 4 that these various participants had in the market, and my 5 comment about whacky good and devoting more energy trying 6 to replicate it, was the concept that investors want to 7 make money. 8 Q If you could turn to the second page of the 9 exhibit, it appears to be an e-mail from Alan Chen to your 10 brother dated January 31 of 2009, PJM daily volume and PnL 11 update. And I am just going to read it, Hi, Kevin, 12 attached please find the daily update report, here is a 13 summary. 14 Does that refresh your recollection as to 15 whether or not your brother was in fact getting daily 16 update reports from Alan Chen? 17 A No. 18 Q It shows here that on this report at least, it 19 says that there was a month to date PnL of $489,746. Would 20 that be, would you consider that a good return, risk 21 adjusted return for one month? 22 A I presume that was a characteristic of a 23 wonderful monthly performance. I don't have -- know, have 24 a very limited recollection of how much was invested to 25 generate that return, but I guess is a very high 63 1 probability that that was a wonderful, beautiful month for 2 us as investors with Allen. 3 Q And is that what the term whacky good would 4 suggest also? 5 A Absolutely. 6 Q Why did you want to have Krishna or find out 7 whether, the question why can't Krishna do that? What did, 8 why were you interested in having Krishna do it? 9 A Krishna was the individual that worked for TFS 10 for some period of time, who was there to help us evaluate 11 the power markets, and my recollection was that he 12 struggled to produce favorable risk adjusted returns. 13 BY MR. OWENS: 14 Q What products did Krishna trade? 15 A I don't know. 16 BY MR. TABACKMAN: 17 Q Would your assessment of how he did here, would 18 this be, would you have made that kind of assessment that 19 he would be doing wacky good based on seeing simply one 20 day's return, or one of these reports, or would you have 21 had to have seen more than that to have reached that 22 conclusion? 23 A The return that is described here is not a daily 24 return. The number that would catch my eye in this. Well, 25 when I say whacky good, it was not the line item No. 3 of 64 1 today's PnL, 64,000. The number that looks like was 2 focused on in this e-mail communication was his month to 3 date performance of the $489,746. So it was a monthly 4 return that I think was the focus of this e-mail 5 communication, but my sense is that I would need more than 6 one month's return to generally describe something as 7 whacky good. 8 Q And what is a five bagger? 9 A I haven't seen that term frequently, but -- so 10 we don't have an exact definition of it, but reading this, 11 reading this whole e-mail thread, I will assume, I assume 12 that Kevin may have meant $500,000. In other words, a one 13 bigger would be 100,000. One bagger is 100,000, so you 14 multiply it by five to get 500,000. And knocking on, means 15 we are getting close to, is the way that I would interpret 16 that communication. 17 Q And Dr. Chen had stated here that the month to 18 date PnL was $489,746; is that right? 19 A Correct. 20 Q So that would be consistent with the knocking on 21 500,000? 22 A That is what, the exact number that I used to 23 tried to interpret, speculate what Kevin meant when he said 24 five bagger. 25 Q Was Kevin, if you recall, generally 65 1 enthusiastic? Let's focus on the period of 2008 to 2009, 2 prior to the forming of Powhatan, was Kevin generally 3 enthusiastic about how well Alan was performing? 4 A Kevin was enthusiastic during that period of 5 time on his involvement, his limited involvement in 6 establishing and maintaining relationships with outside 7 managers including Alan. He was enthusiastic about Alan 8 because his, seemed to have a particular expertise in 9 managing money based on the returns that he was generating. 10 Q Is that a yes then, that he was enthusiastic 11 about Alan through that period of time? 12 A During that period of time he was enthusiastic. 13 I don't, when you asked -- I don't want to imply that he 14 was enthusiastic constantly with his relationship with, 15 Powhatan's relationship with Alan from, you know, beginning 16 of 2008 through the end of 2009, but generally, you know, 17 if we can, you know, talk generalities I would say yes. 18 Q And just so, and I don't want you to be 19 confused, Powhatan, do you recall when Powhatan was formed? 20 A I would guess somewhere in the beginning, in or 21 around the beginning of 2009. 22 Q Just so we are clear, and I don't want to you to 23 be confused, Powhatan was formed in May of 2010. 24 A Okay. 25 Q And at least records that we have show that he 66 1 was trading on behalf of the Huntrise Energy Fund prior to 2 that? 3 A Okay. I think I was off a year with my time. 4 Knowing that I would have -- armed with that information I 5 would speculate, I would have -- would have -- if you told 6 me it was 2010 it was formed, I would have said in the 7 first quarter, but I trust you when you say May. 8 Q I just didn't want you to be confused, and also 9 to have the record to be confused, if you thought that this 10 particular document reflected a trade for Powhatan, it 11 reflects trades for Huntrise. 12 Was there a level of supervision or management 13 or oversight that you, Rich, expected Kevin to employ in 14 this relationship? 15 A Yes. 16 Q Can you describe what would be your expectations 17 of what Kevin would do to manage the relationship in an 18 effective way for the investors? 19 A I think his involvement would be to check on 20 Alan's honesty, his integrity, try to verify that he was 21 doing in fact what he said he was doing. His involvement 22 would also be related to somehow monitoring monthly 23 performance, although, it is particularly tricky or very, 24 it sounds easier said than done. Kevin has had a lot of -- 25 or Powhatan or some of these outside managers have 67 1 infrequently lost lots of money, and my recollection of 2 Alan is that this one e-mail, Exhibit 1, describes one good 3 month, but I have a vague recollection that there were 4 months where we may have lost money that, you know, in this 5 general range, on a monthly basis as well. So, when I say 6 manage the returns, you know, just to stay abreast of 7 returns, it is very complicated, you know, and I am not 8 quite sure exact value that is provided. 9 Q Have you ever fulfilled a role similar to the 10 one or analogous to the one that Kevin had with Alan Chen 11 with respect to some other outside manager? 12 A Yes. 13 Q And what was your practice in terms of the 14 supervision, what was the market area that that was 15 involved? 16 A Futures. 17 Q And what did you do to manage that relationship, 18 how often would you get reports from the outside manager, 19 what other things would you do? 20 A I received reports on a periodic basis, maybe it 21 wasn't quite standardized, but a minimum of a monthly 22 basis, because it was custody that an outside firm that 23 sent us monthly statements. 24 My involvement with it was very hands off, and 25 just said that I am not going to stay abreast, reevaluate 68 1 my investment with you based on short term performance, and 2 that I would consider it a long-term investment. 3 Q And in terms of the management of the 4 relationship, would you have expectations that -- what 5 expectations would you have with respect to Kevin's 6 understanding of some of the details of the strategy that 7 Alan was following? 8 A Not much. I do not have high expectations for 9 Kevin's ability to understand what Alan Chen was doing. 10 Q What is your understanding today of what an Up 11 To Congestion trade involves, what is the basis of the 12 trade, you know? 13 A I have limited understanding to this day of what 14 an Up To Congestion trade is. I believe it is connected to 15 a credit, TLC, transmission loss credit, something like 16 that, that was sort of a rebate or incentive to execute 17 transactions in the market. 18 Q Putting aside the TLC aspect, what is it that 19 creates profits or losses in the trading? 20 A It is my understanding of the power markets that 21 you buy at one node and you sell at another node. I 22 have -- from my involvement in the equities side, I know 23 that the goal is to buy low and sell high, and also to 24 consider other incentives that are provided in the market 25 structure. 69 1 Q And in managing the relationship would one of 2 the jobs of the manager be to understand the strategy that 3 the outside manager was following in his selection of these 4 nodes, for example? 5 A I -- as I mentioned earlier, I have a very, I 6 have always had a very low expectation of our ability to 7 understand a manager's trading. It is partially -- as a 8 result of my understanding that there is a conflict of 9 interest between a manager and an investor. If an 10 investor, for instance, comes to me and says I would like 11 to invest in your fund but you have to tell me everything 12 you are doing to manage my money, I would say thank you for 13 the interest, but we are not, this business relationship 14 will not work out. 15 It is also because you have information that is 16 proprietary knowledge or information that you need to 17 maintain for yourself, so I am acutely aware of that need 18 for a manager to keep, to not share, divulge their 19 particular trading strategy. And I am also acutely aware 20 of my, you know, from involvement in managing this 21 relationship that we discussed earlier with the futures 22 trader, that I realized I knew nothing compared to what he 23 knew, and that the best question you can ask is how much 24 money are you investing? 25 You know, check the ethics of the manager, make 70 1 sure that they do what they say they are going to do, and 2 then how much money are you investing, and if it is good 3 enough for your money it is good enough for mine. 4 Q Do you know whether Alan Chen was investing in 5 the same trades that he was making for the Huntrise Energy 6 Fund and later for Powhatan? 7 A Believe he was, and I believe our relationship 8 was structured in a way that our exposure was somehow 9 related to the investments that he made. The exposure of 10 Powhatan as an investor was somehow correlated to the 11 exposure that he was generating for his own personal or 12 proprietary account, I don't even know whether it was his, 13 exclusively his personal monies. 14 BY MR. OWENS: 15 Q When you were managing your outside manager of 16 the futures, did you have an understanding of what futures 17 trading involved? 18 A I don't understand the question. Can you 19 provide more specifics? 20 Q Sure. When you decided to invest with futures, 21 this outside manager who was trading futures, did you have 22 any understanding of how futures trading, the mechanics of 23 futures trading, how the process works, what the product 24 looks like, how you make money or lose money on the 25 product? 71 1 A I had a general understanding of certain 2 mechanics or aspects of the market. 3 Q So in this role, was this a proprietary trading? 4 A Yes. 5 Q So it was your money, and Kevin's money and 6 Larry's money? 7 A I don't recall the specific, my guess is that 8 those two individuals or members of their households 9 participated in this outside investment. I don't recall 10 all the investors who gave money to this manager that I 11 worked with. 12 Q And in investing this money you engaged in 13 sufficient due diligence to understand, as a general 14 matter, what this manager was doing? Obviously he is the 15 expert, as you have said, but you knew what futures trading 16 was, you know what a future is? 17 A Yes. 18 Q But you had no such understanding as to the 19 power markets, that is to say, what Alan Chen was doing? 20 A When the manager was trading money for our 21 account in futures I had a -- general idea that this is a 22 regulated market, that he was an expert, and he showed me 23 his results, either back tested or real-time trading 24 results. That was the impetus for kind of engaging him in 25 this capacity. And then I found out, knew that he was 72 1 investing his own money in the strategy and that was, you 2 know, a big part of what was required for me to follow 3 suit. 4 My understanding of the power markets was 5 substantially less than even what I understood of the 6 futures markets for the time that we made this investment. 7 Futures are something that, or I think a more standard 8 market for retail investors to participate in, whereas, I 9 think that power trading is something that I am not even 10 sure I knew existed in 2005; whereas, probably since high 11 school or middle school I was aware that people trade 12 futures. 13 Q So the power markets to you were fairly exotic 14 products? 15 A Yes. 16 Q And your understanding or your, yeah, your 17 understanding is that Kevin also did not really understand 18 the power markets? 19 A He was trying to learn, but absolutely, when he 20 started to, this process that I think that he knew very 21 close to zero. And I will take that back, I said 2005, the 22 first time I was made aware of it. Whenever Enron blew up 23 I think I was familiar with the concept that there were 24 markets out there, and I watched a movie and/or read a book 25 related to it, and I was familiar with the markets. That 73 1 was probably the first time that I became aware of it, and 2 that might have been predated 2005. 3 Q And then so you were aware that people went to 4 prison as a result of the Enron trading? 5 A I am aware that people went to prison for some 6 involvement in a scandal. I don't, can't say that I am 7 aware that it was, that these individuals who were in 8 prison, Jeffrey Skelling, I believe is that the high 9 profile, and Kenneth Lay, are the high profile people. I 10 don't know that they went to prison for trading or for 11 accounting scandals. 12 BY MR. TABACKMAN: 13 Q Would you have expected Kevin to at least have 14 some understanding, not necessarily of the particulars that 15 Dr. Chen was using to make his trades, but how he was, for 16 example, managing the risk of the trades, would you say 17 that Kevin understands that, have some knowledge of that? 18 A I had some belief that Kevin should be managing 19 risk but not necessarily by the metrics or the methodology 20 that you described. A very good way to measure risks is 21 not by understanding the mechanics of the specific trades 22 but rather managing that advisor's personal investments to 23 the portfolio, thinking that if that manager is comfortable 24 with his or her investments, then I will follow your lead. 25 Q Do you recall, and again this was in, I want to 74 1 focus if you can on the period of 2010, before May of 2010, 2 actually before March of 2010. In that period, discussing 3 or having any conversation with Kevin about the concept of 4 correlated nodes, is that a term that you are familiar with 5 or have heard? 6 A I have heard, definitely have heard the term 7 nodes, in my discussions of power trading. I am familiar 8 with the term correlation. Correlated nodes is not a term 9 that I have any direct knowledge of, heard of being 10 discussed in relation to these investments. 11 Q Did you have any, do you recall hearing from 12 Kevin that he had discussions or with Chen about the impact 13 of volumes on these trades, in other words, how much you 14 could trade and still make money? 15 A The concept of capacity, what we call it in the 16 industry of how much money a particular strategy can handle 17 is one that I am very familiar with, it is one that I deal 18 with on a daily basis since 1997. So that is a very 19 comfortable concept for me. 20 For Alan I have some vague recollection that 21 that was part of the process, where Alan would say how 22 much -- Kevin would say, how much money could you invest 23 and generate these sort of returns or not adversely affect 24 the returns that you are producing. 25 Q You are familiar with the term of a spread 75 1 trade? 2 A I have heard the term. 3 Q And what is your understanding of that, as it 4 would apply to the trading that Alan Chen was doing? 5 A What is my understanding as of today or as of -- 6 Q Today. 7 A My understanding of a spread trade would be, in 8 the equities world we would describe it is analogous to a 9 pairs trade where you buy Microsoft and you, say short or 10 bet against IBM. You hope one goes up and one goes down, 11 and they are highly correlated to each other, so you are 12 not taking a big bet. 13 Spread trade is a concept that I assume, that I 14 believe you are buying at one place and selling in another, 15 a certain amount of units of power, electricity, virtual, 16 something, where you are hedging your risk or exposure to 17 the underlying assets. 18 Q And did you have any understanding as to how 19 that applied to Alan Chen? Was Alan Chen to your 20 understanding engaged in spread trading at anytime? 21 MR. McSWAIN: At what time period? 22 BY MR. TABACKMAN: 23 Q 2009. 24 MR. McSWAIN: I mean, his knowledge -- 25 BY MR. TABACKMAN: 76 1 Q Your knowledge today. 2 MR. McSWAIN: Today. 3 THE WITNESS: As of today I believe Alan was 4 participating in these transactions. 5 BY MR. TABACKMAN: 6 Q And the again based on your knowledge of 7 equities, what is the risk that is typically involved in 8 engaging in a trade such as you describe, buying at one 9 place, as you described as buying Microsoft, selling IBM, 10 what is the risk that the manager would have to be aware of 11 or try to control? 12 A That Microsoft goes down and IBM goes up is your 13 risk. 14 Q And how would, how can you manage, are there 15 ways, recognized ways to manage risk in a spread trade? 16 A Investors -- money managers who participate in 17 these sort of investment strategies in the equity world 18 look for opportunities in time where they think that the 19 probability is low. 20 Q Of the adverse reaction, the adverse outcome; is 21 that what you mean by the probability is low? 22 A Correct. 23 Q Do you have any recollection, again, of knowing 24 back in 2009 how Alan Chen was managing to avoid adverse 25 outcomes in his spread trading? 77 1 MR. McSWAIN: In 2009? 2 BY MR. TABACKMAN: 3 Q Yes. 4 A My recollection in 2009 was that this was and 5 continued to be a very volatile investment, that there were 6 good months like the one that you have described here that 7 we made lots of money for the investors, but that there 8 were other months that lost huge sums of money. 9 So my recollection of Alan Chen was that this 10 was a high risk, continued to be a high risk investment, 11 that was unlike other types of investments that I had made. 12 I entered into this with continued thoughts that we could 13 lose it all. 14 Q Do you recall there coming a time when Kevin 15 told you that there were some developments that would serve 16 to lower the risk of these kinds of trades? 17 A Yes. 18 Q What is your recollection? 19 A At some point in 2010, after a volatile couple 20 of months, I was made aware that some industry participant 21 had encouraged the marketplace where we were effecting our 22 transactions, or where Alan was effecting transactions on 23 behalf of Powhatan, was changing its market structure in 24 such a way that it may affect the investment strategy that 25 Alan was utilizing. 78 1 Q What is your recollection of what that change 2 was and how it affected him? 3 A My recollection was that I was -- I believe at 4 that time I was made aware that there were changes at the 5 marketplace had enacted sometime during our relationship 6 with Alan or maybe a year or two prior, that the exchange 7 or marketplace or regulatory agency was rolling back, if 8 you will. In other words, there was a change that was 9 introduced to the marketplace sometime between say 2007, 10 2010, and at some point in time, maybe the summer of 2010 I 11 was made aware that the market, that this change that was 12 enacted was going to be removed or taken back, rolled back, 13 if you will. 14 Q What was your understanding of what that change 15 was? 16 A I believe it was related to the incentives that 17 the exchange put in place for participants. 18 Q So you are talking about the transmission loss 19 credits; is that what you are referring to? 20 A I believe so. I know the transmission loss 21 credits are one sort of incentive. I don't know whether 22 that is an all inclusive term for this rebate. 23 BY MR. OWENS: 24 Q What does transmission loss mean? 25 A I don't know. 79 1 Q What does a credit on transmission loss mean? 2 A I don't know. 3 BY MR. TABACKMAN: 4 Q Is that the change that you are referring to, 5 though, when you say that you came to understand that there 6 was a change in the marketplace? 7 A Something related to that. I had this general 8 sense that it was something related to credits, TLC's, 9 something along those lines, that was changing. Something 10 in the underlying market structure that was changing that 11 provided different incentives for traders to seek. 12 Q Was it your understanding, did you have a sense 13 that Kevin -- strike that. Did you have an expectation 14 that Kevin would have had a somewhat more detailed 15 understanding of that than you had at the time, given he 16 was the relationship manager? 17 A Yes, but my expectation still for Kevin or 18 anyone is still very low and, you know, for this particular 19 issue, I can look at the equity markets as kind of a 20 baseline, and I understand that how quickly and complicated 21 things are, even for an individual like me who is focused 22 on it full time, to be able to learn, and somebody who is 23 just passively investing with us, their due diligence and 24 if -- is kind of a side venture, is going to have very 25 limited ability to understand the market structure. 80 1 I just think it is impossible, I think it is 2 very difficult. So based on my experience on the equity 3 world, my standards or expectations for Kevin to monitor, I 4 think was the term you used or manage, was still very low, 5 but he couldn't have known less than I did. 6 Q So I guess my question is -- well, strike that. 7 Do you know how often Kevin and Alan Chen communicated with 8 each other? 9 A No. 10 Q Putting aside whether Kevin could have 11 understood all of the details, would you have expected 12 Kevin to at least have received from Alan Chen some 13 explanation as to how he intended to manage risk? 14 A I think that part of Kevin's job evaluating risk 15 that was most critical or important to me that I had the 16 expectations of, was that Alan was going to invest his own 17 money, that we were going to invest our own money, 18 Powhatan's money alongside Alan. So, that is when I had 19 expectations from Kevin. 20 These other things of managing risk, I have lost 21 too much money with outside managers and following people's 22 recommendations and I have had too much experience in the 23 market to believe that you can enter into a relationship 24 with an expert in a new market to really understand much of 25 anything. 81 1 (R. Gates Exhibit 2 identified.) 2 BY MR. TABACKMAN: 3 Q Take a look at that, it is a number of pages, 4 and let me know when you have finished reading it. Just 5 for the record this document ranges, has Bates numbers 6 POW00008000 and goes to 8007; is that correct? 7 MR. McSWAIN: Yes. 8 (Discussion off the record.) 9 BY MR. TABACKMAN: 10 Q Have you had a chance to look at that? 11 A I have. 12 Q And again, the top document appears to be an 13 e-mail from Kevin Gates to Rich Gates, Eric Newman and 14 Larry Eiben, Chao Chen. Would those have been all the 15 owners, people with an investment interest or an ownership 16 interest in the Huntrise Energy Fund at the time? 17 A I don't recall. 18 Q Do you recall other people being involved in 19 Huntrise Energy other than those people? 20 A As mentioned earlier, I think some people had 21 family members who, or household members who invested in 22 the fund. We had other individuals at TFS who, other 23 contacts through work who would invest in some of these 24 proprietary funds. One such individual is Michael 25 Frederick whose name you brought up earlier. 82 1 Q Okay. The subject, the date is March 19, 2010, 2 the subject is ramping up with Alan Chen, and there is an 3 attachment, Rampin up with Alan Chen, the PowerPoint, and I 4 believe that that is here as with Bates numbers POW00008001 5 to 8007; does that appear accurate to you, sir? 6 A The only qualification I will make is that his 7 last name was not described in either the subject or 8 the attachment. 9 Q I am sorry, rampin up with Alan. On the 10 attachment it does say, rampin up with Alan Chen, though; 11 does it not? 12 A The first page of the attached document 13 describes the outside managers last name. 14 Q And do you recall seeing this document at or 15 about the time it was written -- 16 A No. 17 Q -- and appears to be sent to you? Have you had 18 a chance to read it today? 19 A Yes. When I -- I would like to clarify my prior 20 comment. When I say do I have a recollection, I am not 21 saying that I did not read it, I have just, may or may not 22 have reviewed this document at that time. 23 Q If you look at page, I am just going to refer to 24 the last four digits, 8002, called executive summary? 25 A Yes. 83 1 Q I am going to read. The second paragraph reads, 2 PJM just changed things such that UTC traders receive 3 transmission loss credits. Basically UTC traders don't 4 have to pay transmission losses anymore. This creates more 5 opportunities for Alan. But, Alan is fearful that PJM 6 could change its mind and could force UTC traders to pay 7 TLC's. He hasn't heard anything to suggest that they will, 8 but I think he feels that way because it is just too easy 9 for him to make money now. Did I read that accurately? 10 A I believe so. 11 Q Based on your experience, does that refresh your 12 recollection in any way about your having seen this 13 document or any -- having had any discussion with your 14 brother about a change in Alan's strategy or a change in 15 the nature of the trading? 16 MR. McSWAIN: At what time period? 17 BY MR. TABACKMAN: 18 Q At this time period. 19 MR. McSWAIN: Contemporaneous. 20 BY MR. TABACKMAN: 21 Q Yes. 22 A I don't have any specific recollections of 23 talking about this change as happening during 2010 or 24 during this, at or around the time this document was sent. 25 Q Is this one of the documents that you discussed 84 1 with your brother prior to your deposition when you just 2 said that you talked about some documents? 3 A No. 4 Q And you are certain of that? 5 A Yes, when we talked about the dialogue I had 6 last week I am 100 percent certain it had nothing to do 7 with this document. 8 Q Did you talk about any other documents in which, 9 between you and Kevin, you said you reviewed some 10 documents, some -- any e-mails that discuss the 11 transmission loss credits and Alan's strategy in light of 12 them? 13 A I don't believe that is what was discussed, 14 anything relating to Alan's strategy. 15 Q How about the subject of transmission loss 16 credits? 17 A No, I don't believe that was discussed either 18 last week. 19 Q How about the subject of risk free trading, was 20 that discussed with your brother? 21 A Last week, no. 22 Q How about at any other time since this 23 investigation, since you have become aware of this 24 investigation? 25 A Yes, I had become aware that that is an area 85 1 that your agency is focusing on. 2 Q And have you discussed that with your brother? 3 A Yes. 4 Q And what can you relate the discussion that you 5 have had with your brother about, the concept of risk free 6 trading and how it applied to this investigation and what 7 Alan was doing? 8 A Yes, in general we have talked about the concept 9 that risk free trading does not exist, and we have also 10 talked about investment strategies that take place in the 11 equities market that are analogous to, could be analogous 12 to what Alan Chen was performing for our accounts. 13 Q And that would be the high frequency trading 14 that, is that something that you and your brother 15 discussed, that is the analogous? 16 A There are types of high frequency trading that 17 we have compared to this investment strategy that Alan 18 employed for us. 19 BY MR. OWENS: 20 Q What else did you compare to this strategy that 21 Alan employed? 22 MR. McSWAIN: Let's be clear about the time 23 period. You guys are talking -- 24 BY MR. TABACKMAN: 25 Q I am talking about the conversation with your 86 1 brother. 2 MR. McSWAIN: And that is after the 3 investigation started? 4 BY MR. OWENS: 5 Q After the investigation started. 6 A Conversations that I have had -- 7 Q With your brother after the investigation 8 started, you said you discussed analogies in the equity 9 markets? 10 A Yes. 11 Q Just now you mentioned high frequency trading 12 was among them; what other analogies did you draw? 13 A We have talked about something, so-called SOES 14 bandits. I believe it stands for Small Order Execution 15 System, which was an opportunity for investors, provided 16 opportunities for investors to produce favorable risk 17 adjusted returns. We have talked about the concept that 18 there was regulation that allowed Congress to trade based 19 on information they gained from their own investigations 20 that provided them an opportunity to produce favorable risk 21 adjusted returns. And other examples as well, but those 22 are two types that are very different and distinct from 23 each other, and also very separate and distinct from high 24 frequency trading. There are probably other types of 25 examples that we have discussed as well. 87 1 BY MR. TABACKMAN: 2 Q Did you discuss washed orders, washed trades, 3 rather? 4 A We have discussed that term, yes. 5 Q Have you discussed that term in relationship to 6 what Alan was doing? 7 A Yes. 8 Q Does it relate, could you describe your 9 conversation with your brother on that subject? 10 A Yes. We have talked about the concept that if 11 trades have an economic purpose that they are not 12 considered washed trades. I have looked at some, I guess 13 other examples of participants in the market, such as I 14 believe his name is Peter Kellogg, he is a high net worth 15 investor who effected transactions that, I guess some had 16 described as being quote/unquote washed trades or washed 17 sales or something like that, and he had I guess effected 18 those transactions for some other purpose or some tax 19 incentive or benefit. 20 BY MR. OWENS: 21 Q What is a washed trade? 22 A In the equities market I am familiar with the 23 concept. The thing that jumps out most as far as a tax 24 description of a wash trade or a wash transaction, it is I 25 think a very separate and distinct meaning from the type 88 1 definition that you are organization is focus in on, but 2 that is more effecting transactions to minimize your tax 3 obligation at the end of the year, if you buy something and 4 then or sell something and then buy it again within 5 30 days. So that is one definition I am most familiar when 6 I hear the term washed trade, washed transaction. 7 The term that your organization is focusing on I 8 believe is related to trades that take place on the markets 9 with the sole intent, potentially with the intent to 10 confuse market participants and have no economic 11 justification. 12 BY MR. TABACKMAN: 13 Q And what would be an, in your understanding of 14 that last category -- 15 A Uh-huh. 16 Q -- how would you measure or your understanding 17 of economic justification in that last category of trades? 18 A Money in the pocket of the investor, in other 19 words, if you, if the investor thinks that they are going 20 to end up with more money in their pocket then it is not a 21 wash transaction, you know, they have some reason for I 22 guess doing that trade, other than, you know, their sole 23 purpose is not to confuse the marketplace. 24 Q Did you and your brother reach a conclusion as 25 to whether or not what Alan was doing was wash trading or 89 1 was analogous? 2 A At what time? 3 Q I am sorry, in your most recent conversation, 4 since the investigation began. 5 A Yes, we have had the -- a dialogue about, about 6 that. 7 Q And did you and your brother reach any 8 conclusions, just among yourselves, I am not looking for 9 legal opinions but just whether or not you thought this was 10 wash trading or analogous to wash trading? 11 A All of our opinions I think are properly 12 reflected in the official communications that have been 13 presented to the Commission. 14 Q And apart from those, did you and in your 15 conversations with your brother, identify any basis for 16 concluding that these were or were not wash trades or, 17 analogous to wash trades? 18 A Our thoughts on it are described very 19 articulately in our official communications coming from our 20 legal counsel. 21 Q What -- 22 BY MR. OWENS: 23 Q Do you recall what you are legal counsel said in 24 your official communications to the Commission? 25 A That they are not wash trades. It is my 90 1 understanding that that -- that these, there are a number 2 of reasons why these trades were done properly and legally. 3 BY MR. TABACKMAN: 4 Q Would you turn to the next page, and again, this 5 is 8003, and it reads, I am going to read the top: 6 Recently Alan's exposure has significantly ramped up. Alan 7 maintains that his account, and it is in parentheses all 8 caps (HEEPF) close parentheses, isn't taking much risk. He 9 is participating more heavily in the TLC trade which he 10 describes as almost a risk-free way to make money. 11 Did you and Kevin, do you recall whether you and 12 your brother, or you and any anybody else that was involved 13 in the Huntrise Energy Fund, discuss at the time whether or 14 not some of Alan's trades were risk-free, well, almost a 15 risk-free way to make money? 16 A I don't have any specific recollection of any 17 dialogue about that. I -- earlier you asked me what was my 18 sense that Kevin was excited about the relationship with 19 Alan or, and you know, I would describe this, and I said 20 yes, during this two-year window that we discussed, but 21 that it ebbed and flowed. I would just describe there as 22 period of time where he was particularly happy and excited 23 about the opportunities that Alan presented. 24 Q And what was the basis for that excitement, as 25 you understood it? 91 1 A I have very limited recollection of it. I don't 2 even remember whether I read this document at that time. 3 But I would, if I added -- but in hindsight, looking back 4 at this document, at this point in time I would say the 5 change in the market structure was probably, you know, one 6 of the catalysts for Kevin's enthusiasm. 7 Q What was your understanding, what is your 8 understanding of the words that Kevin right here says, he 9 is participating more heavily in the TLC trades? 10 A What was my understanding at that time? 11 Q Yes. 12 A I don't even know that I read that language at 13 that time, so I have no recollection of having any thoughts 14 on that particular line. 15 BY MR. OWENS: 16 Q Earlier today, this morning you said that you 17 initially invested about, somewhere around $50,000? 18 A Uh-huh. 19 Q And you upped that investment at some subsequent 20 time? 21 A Uh-huh. 22 Q In the Huntrise Fund, and that that was a 23 significant amount of money for you? 24 A Uh-huh. 25 Q Why aren't you paying attention to 92 1 correspondence about this fund? 2 A I have limited resources, limited hours in the 3 day, and I found it more effective to focus more of my 4 energies on other business activities. 5 BY MR. TABACKMAN: 6 Q If you turn to page 8005, it says here, Alan is 7 now actively altering his trading to profit from the TLC's. 8 Have you and Kevin, since this investigation started, have 9 you and Kevin discussed that subject, Alan is altering his 10 trading to profit from the TLC? 11 A I don't remember talking about that specifically 12 with Kevin at any point in time, but we have, I do have a 13 recollection of talking about the concept that money 14 managers should rationally change their behavior based on 15 incentives that are offered in the marketplace. 16 Q And what was your understanding of the nature of 17 this incentive, or what you describe, call an incentive? 18 MR. McSWAIN: Now or at the time? 19 BY MR. TABACKMAN: 20 Q Now. 21 A Now, it is analogous to maybe a rebate model 22 that takes place in the equity world, where you can receive 23 some sort of incentives for providing liquidity or paying 24 liquidity. I understand generally that this thing is a 25 little bit more complicated than that. In other words, if 93 1 you were to trade, in the equities world if you were to 2 trade on XYZ exchange and you were to provide liquidity, 3 which means to buy at the bid or sell at the ask, if 4 somebody crosses a spread to you, you are guaranteed X 5 rebate or incentive, or costs even in some marketplaces. 6 And the opposite is the case if you are taking 7 liquidity, you are guaranteed to pay, you know, the 8 opposite sort of financial incentives. So, sometimes if 9 somebody is being incentived, someone is being charged, and 10 it is my understanding that this marketplace is something 11 similar to that, but there are no guarantees. It is even 12 more, you could think you are going to get a transmission 13 loss credit but you are not guaranteed it, which is very 14 different than the equities world where there is a very 15 clear understanding of what this incentive is. 16 Q Have you looked at any time, let's focus on 17 since this investigation has started, the trades that Alan 18 was doing in the months of June and July, May, June and 19 July, actually, for Powhatan? 20 A I recall -- the answer is no, I don't have a 21 specific recollection of looking at individual trades. I 22 do have some recollection of looking, I don't know about 23 the underlying trades, but some analysis that was done upon 24 those trades and I think it was some sort of hourly or 25 intra-day evaluation describing gains or losses during, you 94 1 know, time periods. 2 Q Do you have an understanding, have you ever seen 3 data that -- do you know whether on the trades, let's take 4 it on a monthly basis -- 5 A Yeah. 6 Q -- the trades, and we will focus on June and 7 July of 2010, the ones he was doing for Powhatan -- 8 A Okay. 9 Q -- whether those trades had any possibility of 10 profiting from the spread that Alan had, any profitability 11 to the spread as opposed to the TLC? 12 MR. McSWAIN: I would just remind you not to 13 divulge any privileged information. So that is a reminder, 14 any analysis that can be considered privileged that was 15 directed by counsel. 16 THE WITNESS: Could you repeat the question, 17 please? 18 BY MR. TABACKMAN: 19 Q Have you looked at the trading data and seen -- 20 let me just strike this. I will make a representation to 21 you, okay, that there are, for those months, on the bulk of 22 Alan's trades, he lost hundreds of thousands of dollars in 23 costs, and but for the TLC they would have been 24 substantially losing months, I mean that. Does that -- 25 have you ever looked at data that -- strike that. 95 1 Putting aside any analysis that you have seen 2 from your lawyers, are you aware of, were you aware of that 3 at the time that the trades Alan had structured had, you 4 know, no profitability other than the transmission loss 5 credit, or at least a substantial number of them, and that 6 he had structured them that way? 7 A At the time I had very limited understanding of 8 what he was doing, where the money was coming from. I 9 maintain the position that it was a high risk investment. 10 I believe there were months in between March and the summer 11 months he described where we lost a large sum of money. 12 I understood the concept that there are 13 incentives in the marketplace that could encourage people 14 to seek them, and I can provide an analogy in the equities 15 world that I am very familiar with, a lot of the brokers 16 that we use we pay them a commission but they also get 17 these make-or-take models and historically there have been 18 times where they lose money on us, but they need this 19 additional incentive to be profitable. 20 So it is a concept that somebody could lose 21 money on one piece of a, you know, aspect of a transaction, 22 but when we include everything, that they are making money 23 resonates with me, doesn't seem foreign to me. 24 BY MR. OWENS: 25 Q In the equities market, are you a registered 96 1 broker? 2 A No. 3 Q Have you ever been registered with the SEC, 4 Series 7, anything like that, as a trader, a broker? 5 A I'm a registered investment advisor, we have 6 been registered for I believe since 1998. So when you said 7 registered broker I thought maybe -- I assumed you meant a 8 broker/dealer. Our firm is not a broker/dealer, but I have 9 been I think an investment advisor representative might be 10 the technical term that applies to people like me. 11 Q To your knowledge have you or TFS in any of its 12 equities trading, ever simultaneously bought and sold an 13 equity in order to obtain a liquidity rebate that you 14 described? 15 A No. 16 BY MR. TABACKMAN: 17 Q And just so we are clear, the liquidity rebates 18 that you make reference to, those are open knowledge, I 19 mean it is understood that the marketplace says we are 20 going to give you this for doing this, for this kind of 21 trade? 22 A Yeah, exactly, it is very transparent, and as I 23 mentioned earlier, it is one of the things that 24 differentiates itself from what I understand now is the TLC 25 credit, which is an unknown credit, where you enter the 97 1 transactions and you don't know whether you will receive it 2 or not. 3 If you search on the internet and look for the 4 various exchanges, the make-or-take model is, I believe all 5 exchanges post it on their website or make it very readily 6 available to participants on these incentives, and I am 7 very aware that it affects investors' behavior 8 significantly. 9 Q Since this investigation has, you have been 10 aware of this investigation, have you ever discussed with 11 Kevin trades that were undertaken solely to profit from the 12 TLC? 13 A I am made aware that that is an area that the 14 Commission is concerned about. 15 Q And have you looked at any of the data yourself 16 on Alan's trades to see where his profit was coming from? 17 A I believe I have seen summary data, but I don't 18 believe I have seen underlying, the actual transactions, so 19 the answer to your question I believe is no. 20 Q But you have seen summaries. Do you have a 21 recollection of the, I will just call it the turnaround 22 from unprofitability to profitability that resulted from 23 the TLC in the months of June and July of 2010 on Alan's 24 trading? 25 A Could you repeat the question, please. 98 1 (The reporter read the record as requested.) 2 THE WITNESS: I don't understand the question. 3 BY MR. TABACKMAN: 4 Q We will come back to it. 5 Take a look at this, at the box that is on page 6 8005, the top one that starts off with the words, the last 7 couple of months Alan has found a new risk free trade that 8 takes advantage of the fact that we now collect 9 transmission losses? 10 A Uh-huh. 11 Q Does that reflect Kevin's view that the trades, 12 that he was accepting Alan's characterization as being risk 13 free? 14 A I don't believe so because in his own document, 15 I think in a prior page, maybe in the executive summary 16 that we looked at together, it may have been described as 17 almost, or it was hedged in some manner. 18 MR. McSWAIN: Will you turn to page 8003, that 19 is what we are talking about. 20 THE WITNESS: Yes, I am sorry, thank you, Bill. 21 On page 3, that is where it was referenced. So in his own 22 document he seems to be conflicted on what it is that he is 23 describing. 24 BY MR. TABACKMAN: 25 Q Did it raise any, does it raise any alarms for 99 1 you that if Alan was saying to Kevin, this is a form of 2 risk free trading, it is almost too easy to make money? 3 A When I see something that is described as almost 4 risk free or risk free, I am very skeptical, and that is 5 why a couple months later when there was substantial losses 6 in his account that there is talk about that if I had known 7 about this document I didn't liquidate and I think that is 8 why Kevin didn't liquidate as well. 9 So if he sends this document saying there is 10 risk free money to be had, and then we lose a substantial 11 amount of money in subsequent months, it doesn't seem 12 abnormal to me, it goes to my general sense that Kevin had 13 no idea that what he was talking about, and it goes to the 14 general sense that risk free investments or almost risk 15 free investments are tough things to find. 16 Q Do you know after the point in time when you 17 lost a lot of money, several months later, whether Alan 18 made any adjustments to his trading strategy to deal with 19 that risk? 20 A I would presume, at the time I had no 21 recollection, but I would assume that all managers, 22 professional managers with his expertise and knowledge of 23 the markets, would always evaluate recent performance to 24 try to improve their investment strategy. 25 Q Were you, did Kevin tell you at the time, let's 100 1 deal with at the time in 2010, that Alan was engaged in a 2 strategy in which it appeared to Kevin that the trades 3 would net out to zero dollar wise? 4 A I have no recollection of any specific 5 conversation about the actual mechanics of the trade or 6 detailed conversations about the trade. I had the general 7 sense that Kevin was excited about this opportunity, that 8 we were -- wanted to find more managers who provide 9 exposure to these markets, and that Alan, and that also I 10 had the general sense that Kevin really didn't know 11 anything about it. 12 And as I mentioned earlier, when I say didn't 13 know anything, had very limited knowledge is a better way 14 of describing it, of what was taking place. And it goes to 15 my general thought that it is very difficult to understand 16 what a manager is doing and to fully appreciate the risk. 17 We have a lot of very sophisticated investors 18 and professionals that allocate money to our fund, and if I 19 were to sit down and say please tell me what TFS is doing, 20 my general sense is it would be a tiny fraction of what the 21 actual, the collective brain power of our firm internally. 22 So to answer your question, I don't have any specific 23 recollection. 24 Q Let me put the question to you again. Did you 25 have any conversation with Kevin in preparation -- at any 101 1 time in the period of May, June of 2010, in which he was 2 going to discuss, in preparation for Kevin discussing 3 strategies with Alan Chen? 4 A I don't have any specific knowledge. I know 5 that Kevin was excited about it. I think it is very 6 possible that we talked about something about transmission 7 loss credits, it is a term I am familiar with. I don't 8 remember when I became familiar with it. It is very 9 possible for Kevin to make a comment after sending out a 10 document saying, you know, excited about Alan, let's 11 allocate, or change in the marketplace. So, I think all of 12 those things are distinct possibilities, but I have no 13 specific recollection. 14 Q Do you have any recollection of talking with 15 Kevin in which he expressed concern that one of the 16 strategies that Alan was following would appear to net out 17 to zero on the trades that dollar wise, net out to zero 18 dollar wise, and couldn't see where there was profit to be 19 made? 20 A I don't have any recollection of that. 21 Q Have you talked about that with Kevin since 22 then, since this investigation started? 23 A We have talked about the area of focus for the 24 Commission of this concept that, of trades that have no 25 economic purpose, that take on no risk, and that we have 102 1 talked about generally, and it goes into the comments I 2 made earlier about when we have provided analogies or 3 trying to understand exactly what is taking place, because 4 the world that I come from and Kevin comes from is the 5 equity world, and that is how we are, sort of you know, had 6 conversations with him that relate to equity world. 7 Q Have you ever talked with Kevin about his 8 seeking, this is since the investigation started, of his 9 seeking an investigation from Alan, I am sorry, seeking an 10 explanation from Alan Chen, as to how trades that sent the 11 identical amount of electricity in two directions, from A 12 to B and B to A, at the same time of day in the same 13 volume, his confronting Alan about how that was going to 14 make any money? 15 MR. McSWAIN: I give you the same admonition I 16 have given you several times, don't disclose any 17 information -- 18 BY MR. TABACKMAN: 19 Q I just want to know if he is ever talked to 20 Kevin about whether Kevin talked to Alan at the time about 21 that fact? 22 A I have no recollection that Kevin knew the 23 mechanics of, specific mechanics of all Alan's trades. I 24 know that he had talked to Alan, had met him during various 25 points in time, and if you tell me that 60 Minutes was in 103 1 my office I can tell you that it was probably one of the 2 meetings probably occurred in the summer of 2010. So 3 during this, you know, period of time I know that Kevin 4 engaged Alan and received e-mails, communicated with him. 5 I don't know how frequent the communications 6 were, but I had the general sense that Kevin was asking 7 questions trying to understand, but that his knowledge was 8 very limited, and the best protection that we had was that 9 we were investing alongside Alan. 10 Q But my question is very simple, do you have a 11 recollection of Kevin talking to you since this 12 investigation, at any time, at any time, about either that 13 he was going to confront Alan on this issue of where was 14 the profit on these kinds of trades or since then, you 15 know, what was -- that he had confronted Alan on that 16 issue? 17 A I know it is in the area that he has evaluated, 18 and he has tried to understand where the profits were 19 derived, since the investigation has begun. So it is an 20 area that I know that we have looked at, and it is an area 21 that I would not use the word confronted, because that has 22 negative connotations to me, but I know that Kevin, I 23 believe that Alan had provided information to Kevin to help 24 him dig into this to make a -- to help us understand 25 exactly what happened. 104 1 Q Let me see if I can make the question better, I 2 will rephrase. Do you have any understanding today whether 3 Kevin confronted Alan at the time, in 2010, June of 2010, 4 because he was -- because Kevin was concerned about where 5 the profit was going to come from the kinds of trades that 6 Alan was engaging in at that time? 7 MR. McSWAIN: You know have tried the best to 8 answer like three different ways. If you have more to add 9 you can, but I think it is the same question. 10 THE WITNESS: You know, I will give it one 11 more -- 12 BY MR. TABACKMAN: 13 Q I just want to focus on that period of time, do 14 you have any understanding, I am not talking about since 15 the Commission has taken its steps, but well before there 16 was any investigation, whether Kevin himself had concerns 17 and sought an explanation from Alan because the trades 18 looked like they netted out to zero? 19 A The term confronted and concerns are very 20 strong -- 21 Q I am sorry, asked Alan, I will modify that, 22 asked Alan for an explanation because the trades, to Kevin, 23 looked like they netted out to zero dollars on the trade 24 itself, the spread? 25 A Yes. 105 1 Q Do you have any recollections of talking that 2 Kevin did that? 3 A I do not. I have -- 4 Q Any knowledge, rather, not recollection, any 5 knowledge that Kevin did that at the time, any knowledge 6 that since that time Kevin asked during that time? 7 A Yes, at any -- 8 Q Since, right, that Kevin had that concern? 9 MR. McSWAIN: I think you answered it. 10 THE WITNESS: I have no recollection. I will 11 try one last time here and hopefully this will resolve it 12 to your satisfaction. I had no knowledge that Kevin ever 13 confronted or had concerns about Alan's trading during that 14 time or since that time. So when I hear the terms 15 confronted or concerns, I can answer that no, with a very 16 emphatic, strongly that the word is no. 17 And but I do believe that during the course of 18 managing the relationship during this summer and since then 19 that Kevin has made inquiries to Alan, and I think Kevin 20 has been more successful in getting information from Alan 21 since the investigation has begun. In other words Alan is 22 willing to disclose and provide more information since the 23 investigation began than during our relationship when he 24 was participating in this transaction. 25 BY MR. TABACKMAN: 106 1 Q Has Kevin ever told you of an explanation that 2 he received from Alan in June of 2010 as to where the risk 3 was on these trades that Alan was making at that time? 4 A I think Kevin tried to understand what was 5 taking place during the course of this whole relationship. 6 We saw this document that you presented, Exhibits 2, you 7 know, is similar to the types of things that Kevin would do 8 during the course of the relationship, try to understand 9 what was taking place, try to get some sense of, you know, 10 whether we should add money, whether we should take away 11 money, try to get a sense whether there was more 12 opportunities for us as investors to pursue a relationship. 13 I have no knowledge that during the summer or 14 May of 2010 that Kevin and/or Alan behaved any differently 15 in their communications than what they had done prior. 16 MR. TABACKMAN: Why don't we break. 17 (Whereupon, at 12:48 p.m., the deposition was 18 recessed, to be reconvened at 8:30 a.m. on the following 19 day, Tuesday, May 8, 2012.) 20 21 22 23 24 25 107 1 I HEREBY CERTIFY that I have read this transcript 2 of my deposition and that this transcript accurately states 3 the testimony given by me, with the changes or corrections, 4 if any, as noted. 5 6 7 X 8 9 10 11 Subscribed and sworn to before me this day of 12 , 20 . 13 14 15 16 X 17 Notary Public 18 19 20 21 My commission expires: . 22 23 24 25 108 1 C O N T E N T S 2 3 WITNESS EXAMINATION 4 RICHARD J. GATES 5 By Mr. Tabackman 3 6 7 8 9 10 11 E X H I B I T S 12 EXHIBIT NUMBER IDENTIFIED 13 R. Gates Exhibit 1 59 14 R. Gates Exhibit 2 81 15 16 17 18 19 20 21 22 23 24 25