1 1 UNITED STATES DISTRICT COURT 2 EASTERN DISTRICT OF VIRGINIA 3 - - - - - - - - - - - - - - - - - - -X 4 Federal Energy Regulatory Commission : 5 Plaintiff, : 6 v. Civil Action No. 7 Powhatan Energy Fund, LLC, 3:15-cv-00452(MHL) 8 Houlian "Alan" Chen, HEEP Fund, Inc. : 9 and CU Fund, Inc., : 10 Defendants. : 11 - - - - - - - - - - - - - - - - - - -X 12 Monday, October 25, 2021 13 Washington, DC 14 15 VIDEOTAPED VIRTUAL DEPOSITION 16 OF KEVIN GATES 17 called for examination, pursuant to agreement of 18 counsel, held via Cisco Webex, at 9:03 a.m., 19 before Kim M. Brantley, C.S.R., a Court Reporter 20 and Notary Public in and for the District of 21 Columbia, when were present on behalf of the 22 respective parties: 23 24 25 2 1 APPEARANCES: 2 On behalf of the FERC: 3 DAMON TAAFFE, ESQUIRE 4 JOSHUA FERRENTINO, ESQUIRE 5 DANIEL LLOYD, ESQUIRE 6 PAUL MUSSENDEN, ESQUIRE 7 Federal Energy Regulatory Commission 8 Division of Investigations 9 Office of Enforcement 10 888 First Street Northeast 11 Washington, D.C. 20426 12 (202) 502-8228 (Mr. Ferrentino) 13 Email: damon.taaffe@ferc.gov 14 15 On behalf of Plaintiffs Powhatan Energy Fund, LLC 16 and Richard Gates: 17 CHRISTOPHER L. PERKINS, ESQUIRE 18 Eckert Seamans Cherin & Mellott, LLC 19 919 Main Street - Suite 1300 20 Richmond, Virginia 23219 21 (804) 788-9636 22 Email: cperkins@eckertseamans.com 23 24 25 3 1 APPEARANCES CONTINUED: 2 On behalf of Plaintiffs Powhatan Energy Fund, LLC 3 and Richard Gates: 4 CHARLES A. ZDEBSKI, ESQUIRE 5 Eckert Seamans Cherin & Mellott, LLC 6 1717 Pennsylvania Avenue NW - 12th Floor 7 Washington, DC 20006 8 (202) 659-6605 9 Email: czdebski@eckertseamans.com 10 11 On behalf of defendants Houlian "Alan" Chen 12 HEEP Fund, Inc. and CU Fund, Inc.: 13 WILLIAM BARKSDALE, ESQUIRE 14 Skadden Arps Slate Meagher & Flom, LLP 15 1440 New York Avenue NW 16 Washington, DC 20005 17 (202) 371-7171 18 Email: william.barksdale@skadden.com 19 ALSO PRESENT: 20 Cliff Hamal, FERC Expert Witness 21 Richard Gates - Powhatan Energy Fund, LLC 22 Vincent Falcetano - Remote Video Specialist 23 24 25 4 1 I N D E X 2 DEPOSITION OF KEVIN GATES 3 EXAMINATION BY: PAGE: 4 Mr. Taaffe 11 5 6 INDEX OF DEPOSITION EXHIBITS: 7 K. GATES EXHIBITS: PAGE: 8 K. Gates Exhibit 1. 9/23/10 Transcript 24 9 Testimony of Kevin Gates 10 K. Gates Exhibit 2. 9/7/11 Non-public 28 11 Deposition of Kevin Gates 12 K. Gates Exhibit 3. 9/28/15 email chain 30 13 and attachment from Kevin Gates to 14 Larry Eiben, Bates stamped 15 POWDC_7106 to 7108 16 K. Gates Exhibit 4. 6/4/14 email and 286 17 attachment from Doug Gates to Kevin Gates 18 Bates stamped POWDC_8573 to 8582 19 K. Gates Exhibit 5. (skipped) 20 K. Gates Exhibit 6. 9/13/10 email from 262 21 Robert Steele to Kevin Gates, Bates 22 stamped POW_1865 to 1868 23 K. Gates Exhibit 7. 4/10/8 email from 110 24 Kevin Gates to Alan Chen, Bates 25 stamped POW_7711 to 7714 5 1 INDEX OF DEPOSITION EXHIBITS CONTINUED: 2 K. GATES EXHIBITS: PAGE: 3 K. Gates Exhibit 8. HEEP Fund and TFS 114 4 Advisory Agreement, Bates stamped 5 POW_0071 to 0073 6 K. Gates Exhibit 9. 7/9/09 email from 127 7 Kevin Gates to Alan Chen, Bates 8 stamped POW_7242 to 7246 9 K. Gates Exhibit 10. 7/22/08 email from 122 10 Kevin Gates to Chao Chen, Bates 11 Stamped POW_8996 to 8997 12 K. Gates Exhibit 11. 12/8/09 email from 141 13 Kevin Gates to Richard Gates, Bates 14 stamped POW_8242 to 8245 15 K. Gates Exhibit 12. 3/5/10 email from 147 16 Alan Chen to Kevin Gates, Bates 17 stamped POW_2123 to 2128 18 K. Gates Exhibit 13. 3/19/10 email from 151 19 Kevin Gates to Richard Gates, Bates 20 stamped POW_8000 to 8007 21 K. Gates Exhibit 14. 3/5/10 email from 201 22 Kevin Gates to Alan Chen, Bates 23 stamped POW_6981 to 6982 24 K. Gates Exhibit 15. (skipped) 25 K. Gates Exhibit 16. (skipped) 6 1 INDEX OF DEPOSITION EXHIBITS CONTINUED: 2 K. GATES EXHIBITS: PAGE: 3 K. Gates Exhibit 17. 5/18/10 Advisory 214 4 Agreement between HEEP Fund and Powhatan 5 Energy Fund, Bates stamped POW_0067 to 0070 6 K. Gates Exhibit 18. (skipped) 7 K. Gates Exhibit 19. 5/30/10 email from 222 8 Chao Chen to Kevin Gates, Bates 9 Stamped POW_4268 to 4269 10 K. Gates Exhibit 20. 6/7/10 email from 236 11 Alan Chen to Kevin Gates, Bates 12 Stamped POW_3761 to 3775 13 K. Gates Exhibit 21. (skipped) 14 K. Gates Exhibit 22. 6/25/10 email from 255 15 Kevin Gates to Chao Chen, Bates 16 stamped POW_2438 to 2445 17 K. Gates Exhibit 23. 7/6/10 email from 266 18 Alan Chen to Kevin Gates, Bates 19 8stamped HF-01400 to 01 20 K. Gates Exhibit 24. 7/13/10 email from 267 21 Alan Chen to Kevin Gates, Bates 22 stamped HF-014071 to 014075 23 K. Gates Exhibit 25. 7/22/10 email from 272 24 Kevin Gates to Richard Gates, Bates 25 Stamped POW_2081 to 2082 7 1 INDEX OF DEPOSITION EXHIBITS CONTINUED: 2 K. GATES EXHIBITS: PAGE: 3 K. Gates Exhibit 26. 8/18/10 email from 275 4 Chao Chen to Kevin Gates, Bates 5 Stamped POW_4685 to 4689 6 K. Gates Exhibit 27. (skipped) 7 K. Gates Exhibit 28. 8/24/10 email from 233 8 Alan Chen to Kevin Gates, Bates 9 Stamped POW_4722 to 4725 10 K. Gates Exhibit 29. 3/17/10 email from 207 11 Kevin Gates to Larry Eiben, Bates 12 stamped POWDC6648 to 6649 13 K. Gates Exhibit 30. 6/2/10 email from 228 14 Alan Chen to Kevin Gates, Bates 15 stamped HF-013539 16 K. Gates Exhibit 31. 5/19/21 62 17 @powhatanfundllc Twitter tweet 18 K. Gates Exhibit 32. TFS Capital document 273 19 dated July 28, 2010, Bates stamped 20 POWDC_1965 to 1966 21 K. Gates Exhibit 33. 4/9/15 email from 281 22 Kevin Gates to Tom Schoenberg, Bates 23 Stamped POWDC_9078 to 9079 24 25 8 1 INDEX OF DEPOSITION EXHIBITS CONTINUED: 2 K. GATES EXHIBITS: PAGE: 3 K. Gates Exhibit 34. TFS Capital, LLC 282 4 incorporation document, Bates stamped 5 POW_1488 to POW_1489 6 K. Gates Exhibit 35. 6/14/10 email from 240 7 Kevin Gates to Alan Chen, Bates 8 stamped POW_4837 to 4841 9 K. Gates Exhibit 36. 3/23/10 email from 174 10 Kevin Gates to Alan Chen and Chao Chen 11 Bates stamped POW_6931 to 6936 12 13 (Exhibits attached to original transcript.) 14 15 16 17 18 19 20 21 22 23 24 25 9 1 P R O C E E D I N G S 2 THE LEGAL VIDEO SPECIALIST: Good 3 morning. We are now on the record. Participants 4 should be aware that this remote deposition is 5 being recorded and as such all conversations will 6 be recorded unless there is a request and 7 agreement to go off the record. 8 Private conversations and/or 9 attorney/client interactions should be held 10 outside the presence of the remote interface. For 11 the purpose of creating a witness-only recording, 12 the witness is being spotlighted or locked on all 13 video screens while on speaker view. We ask that 14 the witness or anyone with cohost capability not 15 remove the spotlight setting during the deposition 16 as it may cause other participants to appear on 17 the final video rather than just the witness. 18 For anyone who doesn't want the 19 witness' video to take up the large part of your 20 screen, you may click the gallery view button in 21 the upper right corner of the remote interface. 22 This is the remote video recorded 23 deposition of Kevin Gates taken in the matter of 24 Federal Energy Regulatory Commission versus 25 Powhatan, Civil Action No. 3:15-cv-00442 (MHL). 10 1 Today is October 25th, 2021. The time on the 2 video monitor is 9:03 a.m., Eastern Daylight Time. 3 The remote technician is Vincent Falcetano; the 4 court reporter is Kim Brantley, both representing 5 Ace-Federal Reporters. 6 Will counsel please state their 7 appearances and whom they represent. 8 MR. TAAFFE: Sure. I'll get started. 9 My name is Damon Taaffe. I'm an attorney with 10 FERC's Office of Enforcement. With me -- 11 immediately behind me is Daniel Lloyd who has the 12 same position as me, an attorney in the Office of 13 Enforcement. Participating remotely are Joshua 14 Ferrentino and Paul Mussenden, also attorneys in 15 the Office of Enforcement. 16 It is possible we may have another 17 attorney named Catherine Walsh joining us from my 18 office. 19 Also in the room with me is Cliff 20 Hamal, H-a-m-a-l, who is an expert witness in this 21 matter. 22 MR. PERKINS: And this is Chris Perkins 23 of the law firm Eckert Seamans. I represent 24 Powhatan Energy Fund, LLC. I'm joined by my 25 partner Charlie Zdebski, also of Eckert Seamans, 11 1 and in addition Powhatan's representative, Richard 2 Gates, is also on the screen. 3 MR. BARKSDALE: And this is William 4 Barksdale from Skadden Arps Meagher & Flom 5 representing Alan Chen, HEEP Fund and CU Fund. 6 And I should note it's also possible that my 7 colleague John Estes may join at some point during 8 today's deposition. 9 THE LEGAL VIDEO SPECIALIST: Will the 10 court reporter please swear in the witness. 11 Whereupon, 12 KEVIN GATES 13 called as a witness by counsel for Plaintiff, and 14 after having been first duly sworn, was examined 15 and testified as follows: 16 THE LEGAL VIDEO SPECIALIST: You may 17 proceed, Mr. Taaffe. 18 EXAMINATION BY COUNSEL FOR PLAINTIFF: 19 BY MR. TAAFFE: 20 Q. All right. Okay. Good morning, Mr. 21 Gates. As we said in the introduction, my name is 22 Damon Taaffe. I'm an attorney here in the Office 23 of Enforcement. I -- I don't think we've ever met 24 in person, so this will be our first one-to-one 25 conversation. 12 1 Have you ever been deposed before in a 2 federal proceeding? 3 A. Yes. 4 Q. When was that? 5 A. As recently as earlier this year. 6 Q. Can you tell us -- yeah, can you just 7 tell us what that proceeding was and what your 8 role in it was? 9 A. It's a proceeding where Elmagin Capital 10 is a plaintiff against a former partner and 11 colleague for intellectual property theft. So I 12 was deposed individually and also part of the 13 30(b)(6). 14 Q. Okay. Is that the only time you have 15 been deposed or have there been other times? 16 A. I don't understand the question. 17 Q. The time you just mentioned a moment 18 ago, the lawsuit between Elmagin and Chao Chen, is 19 that the only time you have been deposed in a 20 federal proceeding or have there been other times? 21 A. I don't know. 22 Q. You don't know if you've ever been 23 deposed before aside from that instance you 24 mentioned? 25 A. I don't know when -- what you mean when 13 1 you say "a federal proceeding". 2 Q. Have you ever testified under oath 3 apart from the instance you just mentioned? 4 A. Yes. 5 Q. Can you list those other times, please. 6 A. There's been a -- a handful of times. 7 I was deposed a couple of times earlier by some of 8 your colleagues or perhaps former colleagues at 9 the FERC Office of Enforcement, specifically Steve 10 Tabackman and Tom Olson in 2011. I was deposed in 11 2010 for the similar proceeding. I testified 12 under oath a couple of other times -- perhaps more 13 than that, a couple of other times as well. 14 Q. Okay. Your attorney may have gone over 15 the deposition kind of rules of the road with you 16 and you may know them from your past testimonies, 17 but I just need to go through them quickly. 18 Apologies that I'm telling you something that you 19 know by now. 20 But you understand that you're under 21 oath and you're obligated to tell the truth, 22 right? 23 A. I -- I -- it's my intention to tell the 24 truth and I know I was just sworn in. I don't 25 know what that means when you say "under oath," 14 1 but I know I was sworn in and I intend to tell the 2 truth. 3 Q. That's all we can ask. 4 Are you aware of any reasons that you 5 can't testify truthfully and accurately today, for 6 example, maybe you're under the influence of a 7 medication that was prescribed to you, anything 8 like that, or are you clear to testify? 9 A. I'm -- I'm okay to -- the -- the only 10 issue that I'm aware of is the -- the outstanding 11 issues are I think a lot of these exhibits are 12 from -- many of them are from over a decade ago, 13 so I'll be able to testify to the truth, but my -- 14 my memory isn't that strong where I'll be able to 15 provide a lot of cover for you. That's the only 16 issue that I'm aware of. 17 Q. Okay. And actually that leads me into 18 my next point, which is, this is not a -- a memory 19 contest. It's okay if you don't remember things. 20 The only thing I could ask is that you testify 21 truthfully to what you do remember and if you 22 don't remember something, maybe I can show you 23 something that will remind you, and maybe not. 24 But all I can ask is that you testify truthfully 25 as the truth allows you to do today. 15 1 If you don't understand a question I 2 ask, I'm more than happy to rephrase it. You've 3 already done that a couple of times and hopefully 4 I've rephrased in a way that you can understand. 5 So please let me know if you don't understand a 6 question, okay? 7 A. Yes. 8 Q. By the -- the opposite side of that 9 token, if you understand a question, I'll assume 10 you understood it. 11 Is that fair? 12 A. I don't understand that. If I 13 understood -- if I understand a question you'll 14 assume I understood it? Is that what you just 15 said? 16 Q. No, no. I'm sorry. I'm sorry. 17 If -- if you don't understand a 18 question, please let me know and I'll rephrase. 19 We just went over that. By the same token, if you 20 do answer a question I ask, I will assume that you 21 understood the question. 22 Is that fair? 23 A. The only caveat I would have is I'm 24 already noticing some latency in this 25 communication and I'm not sure if I previously 16 1 just misheard you in your previous statement or if 2 you took it as an opportunity to rephrase your 3 statement. But I would hold out the caveat that 4 there could be communication errors. 5 Q. That's fair. It leads me to the next 6 point which is, as you just noticed, we are not in 7 the same room. There are some latency issues, 8 some lag issues, and we're going to do the best we 9 can. But it's particularly important that we try 10 not to talk over each other. So, two sides to 11 that coin: if I interrupt you during an answer, I 12 apologize and I don't mean to do it. Sometimes 13 people pause in the middle of a statement and I 14 don't know if they're done or if they're just 15 pausing. So, if I interrupt you and you're not 16 done with your answer, please just let me know and 17 I'll let you finish, okay? 18 A. Yes. 19 Q. And by the same token, please to the 20 extent you can allow me to finish asking my 21 question before you answer it because there may be 22 times when I'm setting up a question but I haven't 23 gotten to it yet and it's just easier to avoid 24 confusion if we each let each other finish. 25 There are times in a deposition that 17 1 your counsel may object. You may be familiar with 2 that dynamic. If your counsel objects, generally 3 speaking he is merely interposing an objection for 4 the record and maybe he and I can argue about it 5 in front of a judge later on. But for purposes of 6 these instructions, if your counsel objects, 7 please let him finish his objection. But unless 8 he instructs you not to answer a question, then 9 you'll be expected to answer it after he's done 10 objecting. 11 Do you understand? 12 A. Yes. 13 Q. There is one exception to that dynamic, 14 which is, there's only one person per party that's 15 allowed to object and because Mr. Perkins is your 16 attorney, he'll be the one objecting. That's 17 another way of saying that you, the witness, 18 should not be objecting. 19 So, if for example you have an answer 20 that might implicate attorney/client privilege, 21 you would expect him and maybe hope that your 22 counsel would object and ask you not to answer on 23 the grounds of privilege. But, maybe he doesn't 24 know that there's a privilege issue going on. 25 It's fine and appropriate if you believe there's a 18 1 privilege issue, rather than answering my 2 question, if you think there's a privilege issue, 3 please just say, "I think my issue may involve 4 attorney/client privilege" and we can go offline 5 and you can talk to your attorney about it and he 6 can object if necessary. 7 Does that make sense? 8 A. I think so. 9 MR. PERKINS: Damon, this -- this is 10 Chris. That -- that -- that makes sense to me, as 11 well. As you know, I've only recently become 12 involved in a case that has a -- a long history 13 and there's been a lot that's occurred that's 14 outside of my knowledge. So I think if that does 15 come up, that would be a good way to handle it. 16 MR. TAAFFE: Okay. 17 BY MR. TAAFFE: 18 Q. We'll take breaks throughout the 19 proceeding. This is not an endurance contest. If 20 you need a break at any point, please just let me 21 know and we're happy to accommodate. The only 22 exception to that is, if I ask you a question, I 23 would request that you answer it before we take a 24 break and then I'm happy to do it. 25 Before we get started on the substance, 19 1 are -- are you communicating with anyone right now 2 other than your counsel, maybe by text message or 3 email or instant message? 4 A. Yes. 5 Q. Who are you communicating with right 6 now, apart from your counsel? 7 A. You. 8 Q. That's a good answer. I've not heard 9 that one before. 10 Anybody besides me and your counsel? 11 A. No. 12 Q. Okay. I would -- I would ask that you 13 not discuss anything having to do with these 14 questions during the deposition itself. It's a 15 free country. You have a right to talk to who you 16 want to. But if you were to, for example, have a 17 phone conversation with anyone other than your 18 counsel during the deposition, I would ask you if 19 you've done that and it probably wouldn't be 20 privileged and I'd just prefer to avoid the 21 complication. So I would request that you not do 22 that. 23 A. I'm sorry, could you repeat that? 24 Could you repeat that, please, Damon. 25 Q. Sure, sure. 20 1 During the deposition today, I'd like 2 to avoid a situation where you're having, for 3 example, a text message exchange with somebody you 4 work with, maybe your brother Rich, and those text 5 messages or instant messages may affect the 6 answers you're giving. All I'm telling you is 7 that, from time to time during the testimony 8 today, I'm going to ask if you've talked about 9 this testimony with anyone other than your 10 attorney, and if the answer is yes, I'm going to 11 ask you what the conversation was. I'm not trying 12 to play gotcha. I'd prefer if you don't do 13 that -- 14 (Network interference). 15 THE COURT REPORTER: Pardon, Mr. 16 Taaffe. This Kim, the court reporter. I 17 apologize for interrupting, but half of your 18 question was obliterated. Would you please repeat 19 it. 20 MR. TAAFFE: Yes. Thanks. 21 BY MR. TAAFFE: 22 Q. If you are communicating with anyone 23 other than your attorney during the deposition 24 today, there's an excellent chance that those 25 communications would not be privileged and I would 21 1 encourage you not to do it. Because I'll ask you 2 from time to time if you are communicating with 3 anyone other than your attorney, and if the answer 4 is yes, I'll be forced to ask you what you're 5 talking about. I'm not trying to play gotcha. 6 I'm just telling you and giving you a heads-up 7 that we prefer to avoid that complication. So I 8 would encourage you to avoid talking during the 9 deposition or during breaks with anyone other than 10 your counsel. 11 Do you understand that? 12 A. Not fully. 13 Q. Okay. Well, maybe your attorney can 14 explain it to you during the break. 15 How did you prepare for your deposition 16 today? 17 A. Is it -- may I ask a question to get 18 clarification on your last question or your last 19 statement? 20 Q. Absolutely, yes. 21 A. When you say I'm not allowed to talk to 22 anybody besides my counsel, is that specific to 23 Chris Perkins? What if -- or am I allowed to 24 speak with Charlie, for -- for example? 25 Q. A correction and a clarification. 22 1 First of all, you're allowed to talk to 2 whomever you'd like to talk to. You could talk to 3 any attorney. You can talk to somebody who is not 4 an attorney. 5 All I'm telling you is, if you talk to 6 somebody who is not representing you in this 7 case -- that could be Chris; that could be 8 Charlie; you could have another attorney I don't 9 know about -- but if you talk to anybody who is 10 not an attorney, there's an excellent chance that 11 conversation is not privileged. 12 If for example your brother Rich were 13 to send you a text message during the testimony 14 today, that's probably not privileged. I don't 15 want to spend the whole time asking you what you 16 and Rich are talking about. I really just ask you 17 respectfully to limit your conversations to ones 18 with your attorneys during the deposition today. 19 Does that make sense? 20 A. Yes. Thank you for the clarification. 21 Q. Sure. How did you prepare for your 22 deposition today? 23 A. I don't understand the question. 24 Q. What part of it didn't you understand? 25 A. What you mean specifically when you say 23 1 "prepare". 2 Q. Did you review any documents in 3 preparation for your testimony today? 4 A. I reviewed a lot of documents that 5 perhaps will influence my testimony today. 6 Q. What documents do you remember 7 reviewing? 8 A. I reviewed the Zoom link that was sent. 9 I reviewed -- briefly reviewed some of the 10 exhibits that were sent earlier this morning. I 11 over the years have reviewed a lot of documents 12 that could influence my testimony today. 13 Q. Did you talk to your brother Rich Gates 14 about the testimony he gave a few days ago? 15 A. Yes. 16 Q. Can you tell me what you talked about 17 with him. 18 A. We talked about the overall dynamic of 19 it, what I would describe as a -- well, of the 20 deposition. We talked about some of the exhibits. 21 I -- I recall that some of the exhibits were 22 relatively new. We talked about some of the line 23 of questioning. 24 Q. What lines of questioning did you 25 discuss? 24 1 A. The questions specific to Elon Musk. I 2 think there was a question at the end or -- a 3 question or two at the end specific to Elon or 4 Tesla and Solar City, and there perhaps were 5 others. I don't recall. 6 Q. Did you review in preparation for your 7 testimony the depositions you gave in this 8 investigation back in 2010 and 2011? 9 A. I don't understand the question. 10 Q. When was the last time you read your 11 deposition transcript from 2010? 12 A. I don't recall. 13 Q. Was it in the last month? 14 A. Probably not. 15 (9/23/10 Transcript Testimony of Kevin 16 Gates was marked K. Gates Exhibit 1, for 17 identification.) 18 BY MR. TAAFFE: 19 Q. If you would, I emailed you some 20 exhibits this morning. Please open Exhibit 1. 21 Let me know when you've done that. 22 A. I don't believe I have Exhibit 1. I 23 have -- I have a PDF with. It's 34 pages. 24 MR. PERKINS: Yeah, that -- Kevin, hang 25 on. I didn't send you the other email that had 25 1 the other exhibits in it. Hang on a second. 2 Sorry about that. 3 THE WITNESS: No worries. 4 (Brief pause.) 5 THE WITNESS: Actually I don't have 6 my -- I'm not going to be able to get that on this 7 computer. This is a separate computer right now. 8 (K. Gates Exhibit 1 displayed on the 9 screen.) 10 BY MR. TAAFFE: 11 Q. Can you see -- Mr. -- Mr. Gates, I'm 12 sharing an image of a PDF. Do you see this image? 13 A. I see "an" image, yes. 14 Q. This is the transcript of the testimony 15 of Kevin Gates dated September 23rd, 2010. 16 Do you see this? 17 A. Yes. 18 Q. All right. How many times would you 19 say you reviewed this transcript since the 20 testimony 11 years ago? 21 A. Reviewed in any way? 22 Q. Yes. How many times would you say 23 you've -- you've read portions of it? And I'm not 24 looking for an exact number but as best you'd 25 estimate. 26 1 A. That's -- that's hard to say. I would 2 imagine north of ten times -- more than ten and -- 3 and less than a thousand. 4 Q. Okay. Do you recall when you gave this 5 testimony that you swore to tell the truth? 6 A. I don't understand the question. 7 Q. Do you -- do you recall that this 8 testimony that I'm showing you right now was under 9 oath? 10 A. I don't understand the question but 11 I'll try to do my best to answer it. 12 I -- I don't recall specifically being 13 sworn in under oath for this testimony but it's my 14 general understanding that testimonies in front of 15 the FERC Office of Enforcement are under oath. 16 Q. Okay. Did you tell the truth to the 17 best of your ability in giving this testimony? 18 A. Again, I didn't -- it was over you said 19 11 years ago. It's actually over 11 years ago. I 20 have no reason to believe I didn't tell the -- the 21 truth. But to be clear, I don't recall 22 specifically being sworn in and I don't recall the 23 specific testimony. 24 But I have absolutely no reason to 25 believe that I didn't tell the absolute truth. 27 1 Q. In the times that you reviewed this 2 testimony since you gave it, have you come across 3 anything you said that you believed was incorrect? 4 A. Yes. 5 Q. What was incorrect that you said in 6 this testimony? 7 A. I -- I forget specifically but I was -- 8 I know I was given an opportunity to highlight 9 errors in the transcription of the testimony. So 10 I -- I know -- not I know, but I believe that 11 after giving the testimony I was asked to review 12 the transcription and highlight things that were 13 misrepresented or I believe I did not say. 14 Q. In reviewing the transcript and making 15 those corrections, did you correct all of the 16 errors that you found? 17 A. To be clear I'm not exactly sure if it 18 was this testimony or it may have been the one 19 after or it may have been both. But to the extent 20 I was asked to do that, I'm sure that I did that. 21 Q. Okay. But as you sit here right now, 22 is there anything that you would like to add to 23 this transcript? 24 And I'll just tell you, I have a lot of 25 questions for you today, but before we get started 28 1 I just want to make sure that, based on the last 2 transcript, that we're talking the same language. 3 So is there anything as you sit here 4 today that you'd like to correct or add to the 5 transcript from 2010? 6 A. I would need to review the transcript 7 to answer that question, and I don't -- 8 Q. So as you sit here right now you don't 9 know of anything? 10 A. Well, moreover I don't even understand 11 the question. I don't understand when I would 12 need to add something to the -- what it means to 13 want to add something to it. 14 (9/7/11 Non-public Deposition of Kevin 15 Gates was marked K. Gates Exhibit 2, for 16 identification.) 17 BY MR. TAAFFE: 18 Q. That's -- I'm now showing you Exhibit 19 2, and not to hide the ball, I'm going to ask you 20 the same question I just asked you about the 21 previous transcript. 22 So, when was the -- how many times 23 would you say you reviewed volume two of your 24 testimony since you gave it in 2011? 25 A. I don't know. 29 1 Q. Is it more than ten and less than a 2 thousand? 3 A. Probably. 4 Q. Did you tell the truth to the best of 5 your ability in this testimony? 6 A. I believe I did. 7 Q. As you sit here today, is there 8 anything you know of in this transcript that you'd 9 like to change or supplement? 10 A. I -- I don't know if I'd be able to 11 answer this question fully, but as an additional 12 matter, I haven't reviewed this in while. I would 13 need to refamiliarize myself. I would need to 14 better understand your question of -- and get more 15 clarification of what -- what exactly would 16 motivate me or what I should want to augment or -- 17 or -- or supplement. And then finally I would 18 also point out that the same issue -- I believe it 19 was this -- I -- I believe -- I have more 20 confidence in this -- the second deposition, that 21 I was given the opportunity to highlight what I 22 would describe as transcription errors and 23 identify what I perceived to be mistakes or -- and 24 I -- I don't know -- when you showed me that 25 exhibit -- I mean, to be fair, I didn't even see 30 1 the full exhibit. I just saw the first page of 2 it. So I don't even know what -- what the rest of 3 the pages are. But I would need to better 4 understand whether or not this exhibit 5 incorporated feedback that I had provided. 6 (9/28/15 email chain and attachment 7 from Kevin Gates to Larry Eiben, Bates stamped 8 POWDC_7106 to 7108, was marked K. Gates Exhibit 3, 9 for identification.) 10 BY MR. TAAFFE: 11 Q. Okay. If you would, turn to Exhibit 3, 12 which I believe is among the ones that are in this 13 large PDF that your counsel mailed to you, and let 14 me know when you've opened Exhibit 3, please. 15 A. I -- I have the -- the PDF. I'm on 16 page one of 134 and it's labeled Exhibit 3, but I 17 don't know how many other pages Exhibit 3 18 incorporates. 19 Q. Got it. That's exactly where I'd like 20 you to be. 21 So Exhibit 3 is an email chain 22 beginning Bates number POWDC0037106, and it's a 23 few pages long. Feel free to look at it if -- if 24 you want to. But, I -- I would first direct you 25 to page three of this exhibit, which also is page 31 1 three of the PDF. Let me know when you get there. 2 A. So I'm a little confused. I'm there 3 but it looks like the Bates number is different 4 than the one that you had read. 5 Q. That's right. Every single page of an 6 exhibit has a different Bates number. So the page 7 I'm asking you to look at is POWDC0037108, which 8 is page three of this large PDF. 9 Do you see that? 10 A. I do. 11 Q. Okay. Feel free to review but my 12 question is, did you write this message? 13 A. I don't know if other people had audio 14 problems, but you -- you cut out on me for a 15 moment there, Damon, in the middle of your 16 question. 17 Q. Okay. My question is, did you write 18 this document that we're looking at now, page 19 three of Exhibit 3? 20 A. Well, as initial matter I certainly did 21 not write this document. It appears it may have 22 been a -- it appears to be a copy of a document 23 that we would have -- that somebody at -- could 24 have written. But I don't recall if I wrote the 25 original document of which this appears to be a 32 1 copy of. 2 Q. I -- I don't want us to get distracted 3 today by the notion of copies versus originals. 4 I'm not going to show you any original documents 5 today. Everything we have that I'm going to show 6 you is a copy of a document that you or your 7 counsel provided to us. So, if you believe that 8 we've changed an image or something, please let me 9 know. I represent we haven't. 10 But when I ask you if you wrote a 11 document, I'm talking about the original that 12 you're seeing a copy of, okay? 13 A. Okay. 14 Q. Sir, my question is, with respect to 15 this document that we're looking at here, were you 16 the original drafter or was it someone else? 17 A. I don't recall. I could speculate. 18 Q. What would you speculate? 19 A. That I was not the original drafter. 20 Q. Who would you speculate it was? 21 A. I think it might have been Larry Eiben. 22 Q. Are you familiar with this document? 23 Have you seen it a number of times? 24 A. Yes. 25 Q. If you turn to the next page, which is 33 1 Bates number -- gosh, I'm having trouble seeing 2 it, but it's page four of this PDF. Do you see 3 page four of the PDF it is a -- looks like a 4 printout from an Excel spreadsheet? 5 A. I do. I -- I note that it does -- it 6 does -- on my copy it does not appear to have a 7 Bates number or the term "confidential". 8 Q. Okay. Do you know who the letter on 9 page three was sent to? 10 MR. PERKINS: Damon, you broke up. 11 Did you hear that question, Kevin? 12 Because I -- I only heard half of it. 13 THE WITNESS: Yeah, unfortunately I 14 only heard a portion of it as well. I couldn't -- 15 I think I -- but go ahead. Could you repeat the 16 question, please, Damon. 17 BY MR. TAAFFE: 18 Q. Yes. If you -- if you look at page 19 four, there are half a dozen names listed on the 20 left: Chen, Eiben, Frederick, Gates K, Gates R, 21 Harris S, Newman E, Sekelsky G. 22 Do you see those names? 23 A. I -- I think I see what you're 24 referring to but I don't believe that there's half 25 a dozen of them. Moreover I'm not sure I would 34 1 describe them as -- I guess you could describe 2 them as names, but I think they're more -- could 3 be considered like account numbers, if you will. 4 Q. Okay. Going back to page three, it -- 5 this letter or memo begins October 25th, 2010, 6 "Dear Powhatan Energy Fund, LLC Investor," but I 7 don't think it lists who the recipients of this 8 letter are. 9 So do you know who this letter or memo 10 was sent to around October 25th, 2010? 11 A. I don't recall. 12 Q. Do you recall who the Powhatan Energy 13 Fund, LLC investors were as of that time? 14 A. I don't recall the registration of the 15 investors. 16 Q. If you turn to page four of the 17 exhibit, these account numbers, are those the 18 accounts implicated by the letter or memo on page 19 three? 20 A. They may be. 21 Q. Line four there, that it says 22 GatesK004A, do you see that? 23 A. Yes. 24 Q. Is that you or your account? 25 A. I don't know -- I don't know if it's 35 1 me, but I believe it could be an account -- I 2 believe it is an account that I have a -- a 3 beneficial interest in. 4 Q. Are there any other Gates Ks you're 5 aware of related to Powhatan? 6 A. So when you -- you refer to Powhatan, 7 I'm assuming we're talking Powhatan Energy Fund, 8 LLC. I don't -- I'm not aware of any other Gates 9 Ks that are affiliated with Powhatan Energy Fund, 10 LLC. 11 Q. So this GatesK004A, there's a -- under 12 the August column (862,000) October column 13 (287,285.13) in parentheses, and looks like a 14 total column of (1,149,285.13) in parentheses. 15 Do you see those lines? 16 A. I -- do I see those lines? I see 17 there -- there appears to be one -- one row, if 18 you will, with those numbers or numbers similar. 19 To be fair I didn't follow the exact numbers that 20 you listed, but I see the -- the -- if you will 21 the fourth row of this table. 22 Q. Did you receive a distribution of about 23 $1,149.000 from Powhatan Energy Fund on or about 24 October 25th, 2010? 25 A. I'm sorry, could you repeat that 36 1 question, Damon? 2 Q. Yes. You see this -- this gray entry 3 to the right of your name, $1149285.13? 4 A. Yes. 5 Q. Did you receive a distribution of 6 approximately that amount on or around October 7 25th, 2010? 8 A. I don't believe that I did. 9 Q. Okay. Can you say more about that? Do 10 you believe that the amount was different or that 11 you did not receive any distribution? 12 How is the statement I asked not 13 correct? 14 A. Well, as an -- as an initial matter 15 we're talking about capital activity from about 11 16 years ago. So my recollection isn't very clear. 17 That's the initial matter. But I believe -- also 18 when you say "I" I assume you're -- you're talking 19 about me individually. Kevin Gates -- I'm not 20 even sure if that account number that you listed 21 that says GatesK0004A is even me -- is an account 22 of me individually. Moreover, I don't believe 23 that I would have received $1,149,285.13 in a 24 distribution. 25 Q. If you go back to page three, it 37 1 begins, "Dear Powhatan Energy Fund, LLC Investor". 2 Do you see that? 3 A. I'm on page three of 134, the Bates 4 number ending in 108. Yes. 5 Q. Do you see where it says -- 6 A. It begins with a date. It says October 7 25th, 2010. 8 Q. Right. But my question is do you see 9 where it says "Dear Powhatan Energy Fund, LLC 10 Investor"? 11 A. Yes. 12 Q. Did you, Kevin Gates, receive this 13 document in October of 2010? 14 A. I -- I don't believe that I received -- 15 I -- I don't recall receiving this document, but I 16 very well may have and probably -- I know I 17 received a document that very likely was at least 18 similar to this. I don't know what this 19 particular document is that you're showing me, but 20 I know that I -- I individually, on behalf of 21 myself or on behalf of an entity I control may 22 have received -- or did receive a document that 23 was -- either this one or it's certainly something 24 similar to this. 25 My recollection isn't very clear. 38 1 Again this particular document, as it turns out, 2 is, you know, 11 years old, this -- this 3 transaction. 4 Q. In October 2010 were you, Kevin Gates 5 the human being, an investor in Powhatan Energy 6 Fund, LLC? 7 A. I don't recall. 8 Q. It's possible? 9 A. It's certainly possible. I would 10 imagine it was unlikely but I don't recall. 11 Q. Why do you think it's unlikely? 12 A. I would imagine that this investment 13 would be better suited for a -- a trust account, 14 but I -- I don't recall it. The answer -- the 15 goods news is it's very easy to verify both on our 16 end and your end. I know we've provided documents 17 to the FERC during the administrative process and 18 perhaps the civil process that describes the 19 actual investors and I know that we have 20 accounting records somewhere around here where we 21 could get that answer. 22 So I -- I didn't happen to -- I don't 23 recall what it is now, but it's an easy -- an easy 24 question to answer. 25 Q. This account on page four, GatesK004A, 39 1 are you familiar with that account? 2 A. That particular account number I'm not 3 particularly familiar with. 4 Q. Do you recall you or any trust account 5 you held getting a distribution of about 6 $1,149.000 in October or thereabouts, 2010? 7 A. I don't know what "thereabouts" means, 8 so I'm not sure what time frame we're discussing. 9 But I don't believe that this account 10 that appears to have an account number of 11 GatesK004A received one distribution for one 12 thousand -- oh, excuse me, I misspoke, 13 $1,149.285.13. 14 Q. Okay. That's a good clarification. 15 Do you recall that the account that 16 we're talking about, GatesK004A, received two 17 different distributions, one of about $862,000 in 18 August 2010? Do you recall that one? 19 A. I -- I believe that that particular 20 account may have received multiple distributions. 21 Q. I'm sorry -- is that a yes you recall 22 this amount being distributed or no, you don't? 23 A. Could you -- repeat. I'm sorry, Damon. 24 Could you repeat the question. I was trying to -- 25 I was trying to provide clarity to you and kind of 40 1 maybe infer from your question, but it's -- if you 2 were not satisfied with my response, maybe it 3 makes sense for you to ask the question again. 4 I'm sorry. 5 Q. I'm happy to rephrase. 6 You correctly pointed out that maybe 7 you did not receive a distribution, a single 8 distribution of $1,149,000. And so I thank you 9 for your clarification and I realize that maybe 10 what happened was that this GatesK004A account 11 received more than one distribution. 12 So my first question is, do you recall 13 that you or this GatesK004A account received a 14 distribution of about $862,000 in August 2010? 15 A. No. 16 Q. Is it that you don't recall it or you 17 think that did happen? 18 A. I don't think the GatesK004A received a 19 distribution in the amount of $862,000 in August 20 of 2010. 21 Q. Okay. Do you have any idea what this 22 $862,000 number in parentheses refers to? 23 A. I'm not sure but I can speculate. 24 Q. What's your speculation? 25 A. I'm sorry, I'm reviewing the -- the 41 1 entire exhibit to make sure I'm familiar. 2 (Witness peruses document.) 3 A. I believe that 862,000, excuse me, for 4 GatesK004A, there is a dollar amount -- it's a 5 negative dollar amount of 862,000. I believe that 6 that was money that could have been distributed to 7 that account in September of 2010 as a function of 8 the closing net asset value as of the end of 9 August. 10 BY MR. TAAFFE: 11 Q. Okay, okay. Same question for this 12 number in parentheses in the October column. 13 That's $287,285.13 in the row for GatesK004A. 14 Do you see that figure? 15 A. I do. 16 Q. Same question as with the August 17 figure. Do you recall a distribution in that 18 amount going into an account called GatesK004A? 19 A. I -- I don't recall the specifics of 20 that transaction. 21 Q. What would you speculate that number 22 represents? 23 A. Yeah, I -- I don't know. This appears 24 to be ten years old. But that -- if I were to 25 speculate, I would guess that that was a dollar 42 1 amount, $287,285 spot one three was -- could have 2 been distributed to the GatesK004A account perhaps 3 in November of 2010 based upon the net -- the 4 closing net asset value as of October of 2010. 5 Q. Turning back to page three -- maybe you 6 answered this question so I apologize -- but this 7 letter is directed to Energy Fund, LLC investors 8 and it says, "You are receiving this letter 9 because you have requested withdrawal from 10 Powhatan Energy Fund, LLC". 11 Do you see that? 12 A. I see something very similar to that. 13 I'm not sure if you -- you read it verbatim or if 14 I heard it verbatim, but I see -- I think we're 15 looking at the same sentence. 16 Q. Were you or a trust account that you 17 controlled an investor in Powhatan Energy Fund, 18 LLC in October, 2010? 19 A. I don't recall specifically who the 20 investor was. It could have been those accounts 21 that you had described, though. 22 Q. Do you recall who the investors were in 23 Powhatan Energy Fund, LLC in October 2010? 24 A. I -- I don't recall the specific 25 registration of the accounts for the investors of 43 1 Powhatan in 2010, in October of 2010. 2 Q. Is there any document I could show you 3 that would refresh your recollection about who 4 those investors were? 5 A. Yes. 6 Q. What sort of document would that be? 7 A. A document that lists the investors of 8 the fund in 2010. 9 Q. Do you know of such a document? 10 A. Yes. 11 Q. Have you provided that document to us 12 or to your attorneys to provide to us during this 13 investigation? 14 A. It's my recollection that we did and 15 I -- I actually as I recall I made reference to it 16 earlier in this deposition. I think I said that 17 it's something that we could -- we should be able 18 to find. It's my recollection that that was 19 provided to the FERC at least as long as a decade 20 ago -- a decade or -- or maybe a -- yeah, about a 21 decade ago during the administrative proceedings, 22 there were various documents. Moreover, I -- I 23 suspect that was similarly provided during the I 24 guess civil litigation discovery process. 25 Q. Did an account you control of any sort 44 1 receive the distributions that we have been 2 discussing of 862,000 and $287,000 in the fall of 3 2010? 4 Whether it be you, whether it be an 5 account you control, did you get control, directly 6 or indirectly, over these -- these two 7 distributions in fall of 2010. 8 MR. PERKINS: Damon day, I'm going to 9 object to the form. I got a little lost. It was 10 such a compound question. Could you try and 11 restate that? 12 MR. TAAFFE: Sure. 13 (Network interference) 14 BY MR. TAAFFE: 15 Q. Did you yourself or any account in your 16 control receive distributions from Powhatan Energy 17 Fund, LLC in fall of 2010? 18 A. I -- I couldn't hear the beginning part 19 of that question. I'm sorry. 20 Chris, were you -- is that just me? 21 MR. PERKINS: Yeah, Damon, you cut out 22 when you rephrased it. 23 THE WITNESS: Yeah, I feel bad. I feel 24 bad. I don't want to ask you to do it a third 25 time but I promise you cut out. 45 1 MR. TAAFFE: No, for the record, this 2 was why we wanted to do the depositions in person. 3 So I'll try a third time here. 4 MR. PERKINS: I think -- I think, just 5 to be clear, that you all offered to do these by 6 video after Judge Colombell. 7 MR. TAAFFE: I'm not complaining to 8 you, Mr. Perkins. 9 BY MR. TAAFFE: 10 Q. So my question, Mr. Gates, is, did you 11 or an account you control receive distributions or 12 funds from Powhatan Energy Fund, LLC in fall 2010? 13 A. It's certainly possible if not probable 14 but I'm not certain about the account 15 registration. 16 Q. Do you think that -- I didn't mean to 17 cut you off. Are you -- you done? 18 A. I lost my train of thought. I'm sorry. 19 Q. Do you think that you or an account you 20 controlled received distributions totaling over 21 $1,000,000? Is that's something that would stand 22 out in your mind or not? 23 A. I -- I don't know what that means when 24 you say stand out in my mind, but I -- I very 25 well -- I -- if it's all right, Damon, I know -- 46 1 to help -- I'm not sure I understand the exact 2 question, but just -- just to clarify, when you 3 say an account I control, I do have a wife that 4 I -- I -- makes investments from time to time. I 5 don't control my wife. Arguably she controls me. 6 So, I'm not sure what -- 7 Q. Let me try to put it to you -- let me 8 try to put it to you colloquially. 9 If somebody distributed to me or to an 10 account I controlled over $1,000,000, I would 11 remember it. And so I'm asking you if that's the 12 sort of thing that you would remember. 13 A. Something I'd remember. 14 I don't -- I'm sure over the years I or 15 an account I control has received seven-figure 16 distributions that I do not remember. 17 Q. Do you know what became of these 18 amounts of $862,000 and $287,000 after they were 19 distributed to account GatesK004A? 20 A. No. 21 Q. Did you ever know? For example, maybe 22 you knew and you forgot or maybe you never knew. 23 A. Yeah, I -- I suspect, to the extent 24 that those distributions occurred, they would 25 have -- I would have known what had happened to 47 1 those monies, but those monies get commingled with 2 other monies and I -- I don't recall ever having 3 segregated transactions -- segregated ledgers, 4 figured out where those monies went. I do know 5 that there was a big tax liability associated with 6 Powhatan Energy Fund in the summer -- in -- excuse 7 me, in the -- yeah, the summer of 2010. Actually 8 it would have hit the -- the taxes shortly 9 thereafter, liability. So I do know that those 10 monies, you know, created a -- that the fund 11 created tax liabilities. 12 Q. So the -- the funds that were 13 distributed were commingled with other funds. Is 14 that right? 15 A. I -- I suspect they were. Again I 16 don't recall these -- I -- I don't recall what the 17 exact registration of the account was and where 18 the monies were sent to and who controlled those 19 accounts, if it was me, my wife or somebody else 20 or something else. I don't recall the -- the 21 specifics of those transactions. I don't know 22 where the money -- what account it went to. So, 23 typically when a -- well, not typically. Always 24 when you -- no, let me rephrase it. 25 Typically when money is registered -- 48 1 is distributed from one account to another 2 account, these registrations line up. So you want 3 to distribute money from accounts that have 4 similar if not identical registrations. I don't 5 recall even the custodian of the accounts with 6 similar registrations. 7 Q. So you don't know if the funds that 8 were distributed were spent or not? 9 A. I suspect -- do I know if this money 10 was spent. 11 I -- I suspect some of -- the answer is 12 I haven't done a detailed forensics accounting of 13 those months. I don't know where those monies 14 went. But I do know that there was a -- a 15 significant tax liability associated with Powhatan 16 Energy Fund, LLC's trading activity in 2010. 17 Q. It's possible the money was spent on 18 taxes or otherwise? 19 A. I'm sorry, I heard "taxes or other" -- 20 and I missed the last part. 21 Q. Is it possible the money that was 22 distributed was spent in some fashion on taxes or 23 on something else? 24 A. Yes. 25 Q. How is that possible in light of the 49 1 first bullet point on page three that says, "The 2 funds are being released to you but only under the 3 following conditions," and condition one, bullet 4 point one is you will not spend the money? 5 A. "How is that possible". 6 It's -- it's easily possible. 7 Q. Okay. How is it easily possible? 8 If you receive a distribution under the 9 condition that you're not to spend the money, how 10 is it easily possible that you would then spend 11 the money? 12 A. If that condition isn't enforceable or 13 deemed not to be enforceable. 14 Q. Deemed by who? 15 A. We -- so there's -- I guess it gets 16 into perhaps attorney/client privileged 17 discussions and maybe Chris and I need to take 18 this offline as you started the deposition off. 19 MR. PERKINS: Do you want to take a 20 break and -- 21 MR. TAAFFE: Sure. Let's -- let's take 22 five minutes and go off the record and when we 23 come back on the record I'll ask the court 24 reporter to read the question back and we'll go 25 from there. 50 1 THE WITNESS: Damon, if it's okay I'll 2 need a five-minute break to kind of -- kind of 3 tend to some items here but then maybe also I'll 4 need a couple moments to chat with Chris. I think 5 you had directed me to chat with Chris offline, so 6 could I respectfully request a ten-minute break? 7 MR. TAAFFE: Surely. I definitely 8 don't want you to discuss your attorney/client 9 item online. So we'll be here when you get back. 10 Let's call it between five and ten minutes, okay? 11 THE WITNESS: And Chris, I'll give you 12 a -- I'll right you up in three to five minutes. 13 MR. PERKINS: Okay. 14 THE LEGAL VIDEO SPECIALIST: Going off 15 the record, 10:04 a.m. This ends media file 16 number one in the video deposition of Kevin Gates. 17 (Recess taken.) 18 THE LEGAL VIDEO SPECIALIST: We are 19 back on the record, 10:13 a.m. This begins media 20 file number two in the deposition of Kevin Gates. 21 You may proceed, Mr. Taaffe. 22 MR. TAAFFE: Ms. Brantley, would you 23 read back the question I asked regarding if and 24 how the distributions could have been spent. 25 THE COURT REPORTER: Yes, give me one 51 1 second, please. 2 "Okay, question, how is it easily 3 possible? 4 If you receive a distribution under the 5 condition that you're not to spend the money, how 6 is it easily possible that you would then spend 7 the money? 8 And the answer is "If that condition 9 isn't enforceable or deemed not to be enforceable. 10 "Question: Deemed by who?" 11 THE WITNESS: So we -- we have had 12 conversations over the years with a whole bunch of 13 attorneys related to this matter and have been -- 14 received information that has affected our -- our 15 interpretation of this -- this letter. 16 BY MR. TAAFFE: 17 Q. Well, which attorneys gave you advice 18 vis-a-vis whether the conditions on page three 19 were enforceable? 20 A. I don't recall specifically. I know 21 that we've spoken with a lot of attorneys over the 22 years. Most recently we've engaged -- we -- I 23 guess me individually have engaged a -- a firm in 24 Delaware, a couple of firms -- no, me 25 individually. I think individually I've engaged 52 1 one firm in Delaware as it relates to these 2 distributions. I forget the name of the firm but 3 I think it's Richard Layton Fingers and I know 4 that I've spoken to other attorneys over the years 5 as it relates to these distributions. I believe 6 Bill McSwain. And I don't recall but we used to 7 have an attorney who represented Powhatan at the 8 time who was with the firm known as Drinker 9 Biddle. But I think we -- we spoke with him -- I 10 recall -- I believe we did, we spoke with him and 11 perhaps other attorneys as well over the years. 12 Q. So is it fair to say you've spoken with 13 a number of different attorneys over the 14 distributions that we're discussing here? 15 A. Yes. You -- you included. 16 Q. Okay. So given that you recall talking 17 to a number of attorneys about these 18 distributions, is it also fair to say that you 19 remember these distributions? 20 A. As I sit here today I don't recall the 21 actual distributions that occurred and I don't 22 recall the registration of the accounts. I do -- 23 I do know that either my wife or I or entities 24 that we control were involved in these 25 distributions -- involved in distributions that -- 53 1 that we spoke to attorneys about. 2 Q. Do you recall how the distributions 3 were invested? 4 A. At what point in time? Let me -- let 5 me be clear. 6 No, I -- I don't recall how they were 7 invested and I suspect it -- it had changed 8 over -- over time again. This was -- at least 9 this letter is dated 11 years ago to the day and 10 investments and investment opportunities change 11 from time to time. 12 Q. Sure. Is there -- is there a time 13 limit on these conditions that you see in the 14 letter on page three? 15 A. I'm sorry, could -- are you saying -- 16 is -- I believe there is a time limit, yes. 17 Q. Where in the document on page three do 18 you see the time limit that you're referring to? 19 A. I don't recall -- I'm not sure that I 20 see -- well, let me read it. I don't -- and when 21 I answered your question earlier, maybe I'm not 22 sure I answered the -- the exact questions. So I 23 believed that there are time limits, some of which 24 may be described in this letter, some of which may 25 not be described in this letter agreement. 54 1 If you want me to go through this 2 letter agreement, there may be time limits 3 specifically as it relates to the -- this 4 agreement refers to the operating agreement -- an 5 operating agreement. There may be time limits 6 there or it may cite law that has time limits. 7 Q. Do you know whether the funds that were 8 distributed pursuant to this agreement were held 9 in a generally liquid manner and with a reasonable 10 risk profile? 11 A. I'm -- "generally" -- I don't know what 12 "generally liquid" even means and I don't know 13 what a "reasonable risk" -- there's -- there's 14 actually -- I don't know what that means. And a 15 reasonable risk profile seems -- I mean, I 16 wouldn't necessarily describe diversified 17 equity -- the -- the risk profile of a diversified 18 equity fund to be anything similar to a Money 19 Market account. So I'm really perplexed what -- 20 what that even means. 21 Q. Do you think there's a form like this 22 with your name and signature on it? 23 A. "Think there's a form". 24 There very well could be, if not my 25 signature, my wife's signature. There could -- 55 1 Q. Do you think that you or your wife 2 would have signed a form governing distributions 3 of more than $1,000,000 that listed conditions 4 that you didn't even understand? 5 A. Well, if -- if we felt pressure, an 6 undue pressure to do it to the extent we needed 7 monies to pay taxes, I -- I -- to the extent we 8 did, I know that we weren't represented by 9 attorneys and we had signed -- to the extent we 10 signed this letter. I know I didn't engage 11 separate counsel for that. Moreover, I -- I -- I 12 sign agreements I don't understand all the time. 13 I just earlier this year applied for a 14 credit card and I know that there was an agreement 15 in that credit card application and it was -- it 16 was so confusing I didn't -- I didn't even try to 17 read it. But I -- but I -- but I signed it. 18 Q. Fair enough. As a hedge fund manager, 19 do you know what the phrase "generally liquid" 20 means? 21 A. "As a hedge fund manager". 22 Q. If one of your investors asked you to 23 keep an investment in a generally liquid form, 24 would you say "I have no idea what that means" or 25 would you know what that means? 56 1 A. I would probably -- I would ask for 2 clarification what that means. Is that -- I mean, 3 so, there is a whole -- it's a continuum of 4 liquidity. 5 Some products have -- I mean, I think 6 even Bitcoin has continuous liquidity 24 -- 24/7. 7 So you could always perhaps buy and sell. There 8 are stocks or ETFs that have liquidity. But 9 generally the market's only open -- I mean, 10 there's a pre-market and investor market, but are 11 generally only open from 9:30 to 4:00 Eastern 12 time. 13 There are mutual funds that daily 14 liquidity but it's only during the -- the week 15 days. There are investments in the power markets 16 that have monthly liquidity, for instance FTR, 17 some of the FTR products, and then there are other 18 products that are even longer. There are some 19 annual FTRs and there's some venture capital funds 20 or real estate funds that I think capital can be 21 tied up for -- for years if not decades. 22 So I -- I don't know what that means, 23 what's reasonable and what's unreasonable. I -- I 24 don't even -- that doesn't even make any sense to 25 me. 57 1 Q. Did you go to your co-investor, Larry 2 Eiben, who you said wrote this and say, "I don't 3 understand what this means; can you explain it to 4 me?" 5 A. I -- I -- to be clear, I don't believe 6 I said Larry Eiben wrote it. I speculated that he 7 may have written it. But I don't recall 8 conversations that I may have had over 11 -- 11 or 9 plus years ago. 10 But as I sit here today, this -- this 11 doesn't -- it really makes no sense to me. 12 Q. Okay. Are you familiar with an entity 13 called LSE Capital Management, LLC? 14 A. Yes. 15 Q. Are you affiliated with that entity or 16 were you? 17 A. I believe you asked me two questions 18 and I believe the answer to both of them is yes. 19 Q. Okay. What is your involvement with 20 LSE Capital Management, LLC? 21 A. What is my involvement? I believe I am 22 a -- I think I may be an -- either me or a trust 23 that I control could be an owner of that entity 24 today. 25 Q. If you agree for whatever reason to do 58 1 so, could you direct LSE Capital Management to 2 make a payment? 3 A. I don't understand the question. When 4 you say could I direct it to make a payment? 5 Q. Yeah, yeah. So you said you're an 6 owner of it directly or indirectly, and I'm asking 7 you could you direct it to make a payment that you 8 wanted it to make? 9 A. It's possible that I could. I -- I 10 suspect there are definitely some payments that I 11 could authorize it to make and I suspect there may 12 be other payments that I individually don't have 13 the authority to direct it to make. 14 I'm -- I'm not sure. I'd have to 15 re-review the operating agreement and any sort of 16 policies that -- that LSE Capital management has. 17 Q. Turning to page three of Exhibit 3, 18 this bullet point three, says "You will return the 19 money if deemed necessary by LSE Capital 20 Management, LLC." 21 Who has the power -- it could be more 22 than one person or one person -- but who has the 23 power to direct LSE Capital Management to try to 24 obtain this money? 25 A. I am not sure what the operating 59 1 agreement says but I suspect -- I would suspect it 2 would require multiple people to make that 3 determination. 4 Q. Who are Powhatan Energy Fund, LLCs 5 current owners? 6 A. I -- I think -- I've reviewed it 7 recently. I think it's Kevin James Gates Living 8 Trust and the Richard John Gates Living Trust. 9 Q. Are those trusts controlled by you and 10 your brother Rich respectively? 11 A. Yes. 12 Q. Who is responsible for the messages 13 posted to Twitter using the handle at 14 @Powhatanfundllc? 15 A. I don't understand the question. 16 Q. Are you familiar with a Twitter account 17 ampersand powhatanfund.llc? 18 A. Yes. 19 Q. Who is responsible for the messages 20 posted there? Who posts the messages there? 21 A. So there are -- there are a lot of 22 different messages that been posted or could be 23 posted. I know that that account from time to 24 time may post or retweet messages from other 25 people. So to the extent that other people have 60 1 public profiles, those would be the people that 2 would be responsible for the -- the content. 3 I know that from time to time Powhatan 4 creates its own original tweets and it -- those 5 tweets can be -- have various people who have 6 contributed or arguably could be responsible. 7 Sometimes -- I think it recently 8 tweeted a quote from somebody and I forget -- I 9 forget the specifics of it -- but to the extent it 10 quotes somebody else, that tweet could be -- that 11 person would be responsible for the content. 12 Q. So if Powhatan retweets somebody else's 13 message, Powhatan is not responsible for anything 14 in that message? 15 A. I don't believe I said that. Are you 16 suggesting that that's what I said? 17 Q. No, I'm trying to understand what -- 18 what you said, but let me make it more simple for 19 you. 20 Who has the login credentials for the 21 Powhatan Fund, LLC Twitter account? 22 A. I know that that my brother Rich and I 23 know that I do. From time to time other people 24 may have had it as well. But I don't recall. I 25 think that social media account has been 61 1 operational for -- for years now and I'm not sure 2 exactly who from time to time may have had access 3 to those credentials. 4 Q. Have you yourself posted messages to 5 that Twitter account? 6 A. I believe I may have, yes. 7 Q. Has your brother Rich posted messages 8 to that Twitter account? 9 A. I think you said did Rich -- did Rich 10 Gates post messages, and the answer is yes. I 11 believe yes. 12 Q. Are you aware of anybody besides you 13 and your brother who has posted messages to that 14 account? 15 A. With the -- with the login credentials. 16 No, I am not. 17 Q. Does it follow that all of the messages 18 posted to that account were posted by either you 19 or by your brother Rich Gates? 20 A. I don't understand the question "does 21 it follow," but I think -- if you're saying 22 because I'm not aware of anybody who has posted 23 besides Rich and me, does that mean that nobody 24 else posted, and the answer is no. That -- that's 25 not what it means. I wouldn't necessarily be 62 1 aware of -- of people -- other people who may have 2 posted to the account. But I -- but I likely 3 would be aware of. 4 Q. If you disapproved of some message 5 posted to the account, would you have the power to 6 take it down? 7 A. I don't know. That's a good question. 8 I -- I would consult with my brother Rich and he 9 and I unfortunately don't always agree on all 10 matters from time to time, and to the extent he 11 did not want it removed and I wanted it removed, I 12 don't always get my way. 13 Q. Let's imagine a post that you and your 14 brother Rich wanted taken down, both of you agree 15 that you wanted it down; would both of you 16 together have the power to take the tweet down? 17 A. I think we would, yes. 18 (5-19-21 @powhatanfundllc Twitter tweet 19 was marked K. Gates Exhibit 31, for 20 identification.) 21 BY MR. TAAFFE: 22 Q. Would you turn to Exhibit 31 please. 23 This is page 116 of that large PDF. 24 A. So I'm looking at page 116. I'm a 25 little confused. There doesn't appear to be a 63 1 Bates number and it says "R. Gates Exhibit 1" on 2 it. 3 Q. Yup. That's because it was Richard 4 Gates Exhibit 1 but it's also Kevin Gates Exhibit 5 31. 6 Do you see that? 7 A. Yeah, I see Exhibit 31, Kevin Gates, 8 10/25/21. 9 Q. Right. Do you see the tweet at the top 10 of that page? 11 A. Yeah, I see a -- and I know you -- you 12 told me that it's copies of -- copies of documents 13 versus the original. The only caveat or important 14 point here is that Twitter as I understand it is 15 a -- a social media platform and individual 16 things -- individual tweets are part of a larger 17 dialog or conversation. 18 So, this -- I'm not sure. It looks 19 like there's a vertical line above the Powhatan 20 logo, so suggests that maybe there was a kind of a 21 bigger dialog going here. Moreover it says 22 "replying to". 23 So I see -- I see that, but I -- I 24 think it's important to note that this -- nobody 25 else can see this document and that the entire 64 1 dialog is not included here. 2 Q. Okay. My -- my question was whether 3 you saw the tweet at the top of the page. Is it 4 fair to say you do? I just want to ask you some 5 questions about it. 6 A. Yeah, I was just clarifying. 7 I see what you're referring to as a 8 tweet, but I'm not sure it's a -- I don't want to 9 get is an argument, but is not part of the social 10 media platform and -- I see what you're speaking 11 of. 12 Q. My -- my question is pretty simple and 13 if context is important, please provide the 14 context. 15 But my first question is, who posted 16 this tweet? 17 A. I -- I don't recall who posted that 18 tweet. 19 Q. Could it have been you? 20 A. I'm sorry? 21 Q. Could it have been you? 22 A. I don't think it -- it could have been. 23 I don't believe it was, though. 24 Q. Have you seen this tweet before the 25 deposition today? 65 1 A. Yes. 2 Q. The tweet says "I suggest asking them 3 what happens to innovators (e.g. Blythe, Silkman, 4 Alan, et cetera) when the government tosses out 5 bogus allegations of fraud". 6 Did I read that correctly? 7 A. Yeah, it was close enough. 8 Q. All right. Is the Alan referred to 9 Alan Chen? 10 A. I -- I don't know. I didn't post -- as 11 I think I had said earlier a couple moments ago, I 12 didn't post this tweet. I -- I don't know -- I 13 don't know who it specifically references. I do 14 recall that -- 15 Q. Do you believe that Alan Chen -- do 16 you -- 17 A. It's -- I'm sorry. Yes, I've finished. 18 I do recall you asked me earlier if I 19 had seen had before and I -- and as we noted a 20 couple moments ago it was also an exhibit in a 21 deposition conducted last week and I -- I -- I 22 through that deposition as a representative of 23 Powhatan and I believe questions were asked of my 24 brother Richard and I believe that he had said 25 that Alan was likely Alan Chen. I -- I forget the 66 1 exact language that he had used though. 2 Q. Now that you mention it, you said you 3 sat through your brother Rich's deposition last 4 week. 5 Is that right? 6 A. Through a lot of if not -- certainly -- 7 certainly most of it. I don't know if I -- I 8 caught every -- everything. 9 Q. Did you disagree with anything you 10 heard him say? 11 A. "Did I disagree"... yes. 12 Q. What did you disagree with? 13 A. He -- I -- I think there was a part of 14 the testimony when he was -- we were talking about 15 the Pufferfish Foundation and there was a 16 discussion of what Pufferfish had done with its 17 assets, distributed its assets, and he made 18 reference to some entertainer who wore a meat suit 19 and I think he was referring to Lady Gaga, who has 20 a nonprofit organization that -- I forget, it's 21 Free to Be Me or something like that. And I 22 know -- not I know, but I believe that the 23 Pufferfish Foundation had contemplated or explored 24 the possibility of distributing the money to that 25 foundation or that nonprofit. 67 1 However I believe that it did not. 2 Moreover I believe that there is a more local 3 nonprofit foundation in -- based in the city of 4 Philadelphia to help kids learn kind of 5 anti-bullying in the schools, and I believe the 6 Pufferfish Foundation actually distributed the 7 money to -- to that nonprofit. 8 Q. Do you disagree with anything he said 9 about Powhatan Energy Fund, LLC's investments? 10 A. I don't -- I don't recall. 11 Nothing jumped out at me but I -- I 12 don't recall everything that he said and I didn't 13 sit in on the entire -- I may have not have 14 listened to everything. 15 Q. Looking at this tweet that's in Exhibit 16 31, it was posted in May of this year. Do you 17 consider Alan Chen to be an innovator? 18 A. Like -- at one point Alan was an 19 innovator, yes. Now I think he's unfortunately a 20 broken man. He's had his livelihood ripped from 21 him. 22 Q. Okay. Do you consider Thomas Edison to 23 be an innovator? 24 A. Yes. 25 Q. Okay, but he has passed away long ago, 68 1 right? 2 So can we just talk about the man as a 3 whole? Do you consider Alan Chen now or in the 4 past to be an innovator? 5 A. Now or in the -- yeah, I previously 6 said that I had in the past considered him an 7 innovator as such, now or in the past, yes, he was 8 an innovator. 9 Q. All right, what time period was he an 10 innovator? 11 A. So I don't know Alan's full background. 12 I know that he was born in China and pursued his 13 graduate studies in China and moved to the United 14 States when he was in his mid to late 20s. That, 15 as I think about myself when I was in my mid to 16 late 20s, I think I would have -- it would have 17 been very hard for me to move to the other side of 18 the globe, but, you know, to -- to pursue a better 19 life. I mean, even if there are better 20 opportunities for me elsewhere in the United 21 States, it would be hard for me to -- to kind of 22 transplant everything that I know. You know, I 23 grew up in Chester County, Pennsylvania -- 24 Q. Okay. Sorry, I -- Mr. -- Mr. Gates, I 25 did not ask for your biography. Let me be more 69 1 specific in my question. 2 During the time when Alan Chen was 3 investing in a relationship with Powhatan, LLC, 4 did you consider him to be an innovative investor? 5 A. If it's all right, can I finish my 6 response to the last question? 7 I -- I was just trying to explain that 8 earlier in his life I suspect the man was very 9 innovative to pursue a life in the United States 10 but I'll hold off from providing too much color 11 explaining that. 12 In his -- I suspect so. I think he 13 started his -- well, in his -- I'm sorry, in his 14 time when he was trading for Powhatan Energy Fund, 15 LLC did -- was he an innovator? Was that the 16 question? 17 Q. Yes. During the time when Powhatan 18 Energy Fund was trading in a contractual 19 relationship with HEEP Fund, did you consider Alan 20 Chen to be an innovative trader? 21 A. "An innovator (sic) trader". I don't 22 recall what my thoughts were, my precise thoughts 23 were as it relates to his trading -- my precise 24 thoughts were 11 years ago -- over 11 years ago as 25 it relates to his trading. 70 1 Q. Are you familiar with the website 2 called ferclitigation.com? 3 A. I'm familiar with a -- a website where 4 that's the -- the URL, yes. 5 Q. All right. Who's responsible for the 6 content posted to that website, by which I mean 7 who actually posted to the website? 8 A. "Who actually posted". 9 So I think it's varied over the -- 10 varied over the years. I know early on there were 11 some -- we had some technical folks who assisted, 12 web developers and others. 13 Q. Who is responsible for the content 14 posted there? Who chooses what content that's 15 posted there? 16 A. I think it's varied over the -- over 17 the years. 18 As we sit here today who would choose 19 what content may or may not get posted. I -- I'm 20 not sure what the specific kind of procedural or 21 specific protocol is, but I -- but there is 22 generally an understanding that either Rich or I 23 would upload documents there. 24 Q. Has it been Rich and you over the years 25 or was it at some point somebody else? 71 1 A. Yeah, earlier I had mentioned that we 2 had some technical folks early on who uploaded 3 some documents in the website and there were other 4 people involved earlier on, as well. 5 Q. But the technical folks would have done 6 it because you asked them to, right? 7 A. The technical -- yeah. To the extent 8 we engaged outside technical folks, I would have 9 hoped that they would have followed directions 10 from Powhatan. 11 Q. I'm changing subjects now. Now I 12 actually am asking about your background a little 13 bit. When did you and/or your brother start TFS? 14 A. When you refer to TFS I'm assuming 15 you're -- you're referring to an entity originally 16 known as Technical Financial Services, that years 17 later had -- 18 Q. Yes. 19 A. -- years later had submitted a d/b/a to 20 do business as TFS Capital, LLC. But that 21 business I believe was founded in 1997 would be my 22 guess. 23 Q. Founded by you and Rich or were there 24 others as well? 25 A. There were others as well. 72 1 Q. Who were the others? 2 A. A -- a third partner named Larry Eiben, 3 E-i-b-e-n. 4 Q. Okay, what was your role, Kevin Gates' 5 role with TFS at its founding? 6 A. So we're going back 24 years now. I -- 7 I don't recall but it was a very much of a startup 8 operational -- a startup business. I may have 9 even have had a -- a full-time job at the side to 10 the extent it -- so my involvement was evenings 11 and weekends and it probably involved doing 12 everything -- anything and everything necessary to 13 start a business. 14 Q. Okay. Bringing yourself mentally back 15 to the -- the time period from 1997 through 2007, 16 what industries did TFS focus on, what trading 17 markets that is? 18 A. "Did it focus on". 19 So it -- I mean, I could tell you about 20 the markets it engaged in. It -- it engaged the 21 equity markets, it engaged the commodity markets, 22 the -- the derivative markets and -- and the power 23 markets as well. 24 Q. What was its involvement in the power 25 markets at that point? 73 1 A. At -- a that time -- so when you say at 2 that point, we're -- we're talking about a time 3 period. 4 Q. To be clear, just before you met Alan 5 Chen, what sort of power trading did TFS do? 6 A. TFS was a member of PJM in maybe 2006, 7 2007. 8 Q. As a member of PJM, what sorts of 9 trades were you and Rich in TFS engaging in? 10 A. "What sorts of trades". 11 So they were financial speculative 12 trades. I believe at that time it was specific to 13 the -- the virtual or the day-ahead market, so, 14 products -- trades that would be submitted one day 15 and would settle the next day. 16 Q. Who was in charge of TFS' power trading 17 at that point? 18 A. I'm sorry, could you repeat -- who was 19 in charge of TFS' power trading at that point? 20 Q. Right. Who was deciding what trades to 21 put on for TFS for in PJM's market back in 2006 22 and 2007? 23 A. I -- I don't recall specifically. I do 24 know -- I -- I do believe we had a third-party 25 trader where we gave a limited Power-of-Attorney 74 1 to trade on our behalf and that could have been 2 for TFS. I also know that at one point we hired a 3 trader -- well, he wasn't -- he wasn't a trader. 4 He was more of a programer. But we hired a 5 programer who later submitted trades. And I 6 believe he may have done that on the behalf of 7 TFS. 8 It's also possible that one or -- these 9 people didn't -- this person submitted trades for 10 the separate fund, but I don't -- I don't recall 11 specifically. Again, we're going -- we're going 12 way back. 13 Q. You know, would you say that TFS had 14 in-house power trading expertise or was it more 15 typically an arrangement where TFS partnered with 16 a third-party trader under a multiplier 17 arrangement? 18 A. In the time -- I -- I think it could 19 have been both. I don't recall specifically. I 20 do know that we had -- TFS at one point hired a 21 trader to do modeling of the PJM markets. That 22 could have -- I think that was '06, '07 because I 23 think the -- kind of when the financial crisis or 24 the mortgage meltdown happened in '07, it kind of 25 through a monkey wrench into our business and we 75 1 got distracted and I think that was the impetus or 2 influenced our decision to focus our resources 3 elsewhere. 4 Q. Do you recall what kind of modeling 5 that individual was doing? 6 A. "What kind of modeling". 7 Well it was modeling the -- the 8 day-ahead versus the real-time market. No, I'm 9 not even sure if that's the case. 10 I think he was -- I -- I don't recall. 11 I'm sorry. 12 Q. Prior to meeting Alan Chen, how would 13 you describe your personal knowledge of the power 14 markets and your personal expertise in power 15 trading? 16 A. How would I describe it. 17 I -- it was in new markets for us. I 18 think we had two or three other traders over the 19 years who had engaged the markets. I -- I mean, 20 at that time, just even knowing the markets 21 existed was considered an expertise because the 22 markets were so small and niche at the time. But 23 I did -- it's not what I spent my -- my days 24 doing. It's not what I -- you know, at -- at that 25 time I had two young children at home. I had just 76 1 moved and had a -- a day job and was going into 2 a -- dealing with a major credit crisis. So I had 3 a lot on my plate and this was not something that 4 I spent a lot of time on. 5 Q. Was your focus now on securities 6 markets and equities markets? 7 A. Well, my focus was on -- I mean, really 8 my focus was on my -- my -- my family would 9 probably be my focus, but my professional focus 10 would be on TFS and at the time there were a host 11 of issues with TFS. There was a -- you know, a 12 lot of management issues with TFS and other 13 things. But I personally at that time had more 14 financial exposure into the equity markets and 15 perhaps commodity markets than the power markets. 16 Q. Thinking about the equity -- okay. 17 Thinking about the equity markets and the 18 commodities markets, in your experience is a 19 particular kind of trade always legal or illegal 20 or does context sometimes matter? 21 MR. PERKINS: I'm going to just impose 22 an objection to the extent you're asking him for a 23 legal opinion. 24 But Kevin, you -- you can go ahead and 25 answer. 77 1 THE WITNESS: So as -- as an initial 2 matter I differentiated commodities markets from 3 the power markets earlier in my response and I was 4 talking about futures markets that are regulated 5 by the CFTC that, just to make sure the transcript 6 is clear, I do consider power to be a commodity. 7 BY MR. TAAFFE: 8 Q. Okay. 9 A. So, I want that on -- on the record. 10 But, yeah, I've had a whole host of 11 conversations with attorneys over the years as it 12 relates to trading activity in various markets and 13 I think context matters, specifically -- yeah, I 14 think context can matter. 15 Q. All right. 16 MR. TAAFFE: Chris, as to your 17 objection, I'll -- I'll grant you a standing 18 objection that any question I ask may call for a 19 legal conclusion -- (network interference) asking 20 for his understanding as a trader or whatever the 21 applicable standards are. 22 THE COURT REPORTER: I'm sorry, Mr. 23 Taaffe. The whole statement blanked out. I 24 apologize. My apologies. 25 MR. TAAFFE: I'm willing to grant a 78 1 standing objection for the duration of the 2 testimony that any question I ask may call for a 3 legal conclusion. So in asking these questions 4 I'm asking Mr. Gates' understanding as a trader in 5 whatever the extent of his knowledge of the law he 6 can tell me. But I'll just grant you that 7 standing objection so you don't have to keep 8 making it, otherwise I think you can make it 9 pretty often. 10 MR. PERKINS: Fair enough. 11 BY MR. TAAFFE: 12 Q. My next question, Mr. Gates, is in the 13 securities markets are you familiar with the term 14 called wash trading? 15 A. Yes. 16 Q. What's your understanding of that 17 trade -- that term? What does it mean? 18 A. A -- a wash trade is when identical 19 securities are bought and sold -- sold 20 simultaneously. 21 Q. But do you understanding -- do you 22 understand that in some contexts wash trading is 23 prohibited by the SEC? 24 A. So, I'm not sure I -- I understand. I 25 do know that some wash trading the SEC finds 79 1 permissible. Some wash trading it would deem -- 2 may deem not permissible. But I think it would 3 ultimately be up to the courts to prohibit such 4 behavior. 5 Q. You've managed millions if not billions 6 of dollars in investments in your career, right? 7 A. Yes. 8 Q. What is your understanding of the 9 circumstances in which the SEC would consider wash 10 trades prohibited? 11 A. So I'm clearly not an -- an attorney. 12 I'm just a -- a small businessman. But it's my 13 understanding that it requires ulterior motives or 14 scienter, if you will, but wash trading done for 15 business purposes is permissible. But if it -- if 16 there are ulterior motives for it to rig a price 17 or something like that, then the SEC might be 18 concerned. 19 Q. Can you say more about that? What -- 20 what in your mind distinguishes a business purpose 21 from an ulterior motive with respect to the wash 22 trading rules? 23 A. So in my -- I think it was in my first 24 or second deposition it -- or, no, in 2010 or 25 2011, I made reference to somebody that did 80 1 undeniable wash trading. Oh, I forget the 2 gentleman's name. A guy who started a market 3 making business and sold it to Goldman decades 4 ago. I forget his name. But he had an offshore 5 insurance company and he moved -- owned 6 securities, wanted to continue owning those 7 securities but re-register them in a separate 8 account so that he could -- I think there were tax 9 benefits associated with that. So, he almost 10 simultaneously bought and sold the same security 11 so he could just effectively re-register it in an 12 offshore account, and that was deemed permissible. 13 I think -- not I think. I know last week during 14 my brother's deposition he made -- he made 15 reference to a wash trading for purposes of 16 corporate governance. There was an economist at 17 the SEC who suggested that it was possible to -- 18 that the -- that the corporate governance process 19 wasn't working perhaps as intended or that there 20 was opportunity set there from wash trading. 21 I also know that TFS gave wash trading 22 in its business activities. One such example was 23 wash trading for the explicit purposes of the 24 greater good of society and also the benefit of 25 our investors to try to improve execution by 81 1 highlighting and exposing structural opportunities 2 in the latency of the -- the SIP feed. 3 Q. Is it fair to say that wash trading, 4 then, in your understanding may be legal or 5 illegal, depending on what the trader's purpose 6 is? 7 A. I -- I -- in general I think that's a 8 fair summary. I don't think our -- you know, it's 9 possible that our -- our attorneys may, you know, 10 argue for a more nuanced description of it. But 11 on a very high level that's not unreasonable -- to 12 me as I sit here today, not an unreasonable 13 description of it. 14 Q. Are you familiar with a term in 15 securities or commodities called "marking the 16 close"? 17 A. I believe so. 18 Q. Might also be called "banging the 19 close," if that's a term you're at all familiar? 20 A. It's not a term that we -- neither of 21 those are terms that I'm overly familiar with. We 22 don't spend a lot of -- I -- we don't talk about 23 that frequently or never have talked about that 24 frequently. But I -- I think I know what we're 25 speaking of. 82 1 Q. Okay. I'm reading from a supreme court 2 case, the supreme court has called it, "The 3 practice of attempting to influence the closing 4 price of a stock by executing purchase or sale 5 orders at or near the close of the market". 6 Does that term sound familiar to you? 7 A. So it does. I'm not sure -- I mean, 8 again I'm not an attorney and I don't read court 9 precedent, but that helps explain at least in 10 part. That was the part that I already kind of 11 speculated was the case. The other issue is there 12 might be -- I don't know if there's something else 13 associated with it specifically as it relates to 14 ulterior motives for it sounds like artificially 15 affecting the closing price of a security. 16 Q. Right. Do you understand that there's 17 any prohibition on marking the close? 18 A. I -- I don't know. I'm not an attorney 19 and I -- I don't know market -- I'm more familiar 20 with some of these wash trading discussions that 21 we were having than with the close. 22 Q. As -- as a market -- as a money manager 23 you don't have any understanding about the 24 circumstances in which a -- a trader is free to 25 make volume -- high-volume trades at the close of 83 1 the market day with the attempt to influence the 2 closing price? 3 A. I'm sorry, could -- could you repeat 4 that question again, Damon. 5 Q. Sure. As a money manager, do you have 6 any understanding that it is prohibited to attempt 7 to influence the closing price of a stock by 8 executing orders at or near the close of a market? 9 A. So, as a money manager, I engage in -- 10 at this point in the power markets, so, I'm not -- 11 and there's no really closing -- there's no 12 closing price. I'm -- I'm not involved in 13 these -- any markets where such activity could 14 take place. 15 I would note that I'm a little bit 16 confused because really all trades and even, you 17 know, trades that are executed and not executed 18 can -- can in due affect closing prices. There's 19 something we call market impact. So to the extent 20 I may -- you know, in my personal or individual 21 account submit a trade at 3:59:59 -- as I 22 understand it, the equity markets are, you know, 23 largely driven on supply and demand -- and to the 24 extent my demand -- my order is -- is entered into 25 the market right before the close, it can affect 84 1 or it does affect the supply and demand and 2 therefore could affect or would affect -- could 3 affect I guess I should say the closing price. 4 So I'm a little bit confused here of 5 what we're -- what we're speaking about -- 6 Q. Let's -- 7 A. -- because all market activity affects 8 prices. That's -- it's what we describe as, you 9 know, price discovery. 10 Q. Yeah. Let me try to maybe get us to 11 come to an agreement on what this term means. I'm 12 going to read the supreme court's definition 13 again. 14 "Marking the close means the practice 15 of attempting to influence the closing price of a 16 stock by executing purchases or sales near the 17 close of the market". 18 So I heard you to say and I agree with 19 you that buying and selling has a price effect. 20 The term marking the close, though, has to do with 21 when you engage in trades for the purpose of 22 influencing the price. That is your purpose. 23 So do you understand the distinction 24 between an effect and a purpose? 25 A. I -- I think so. Again I'm not an 85 1 attorney and I don't -- don't make a practice of 2 repeating -- reading court precedent. 3 But I think what you're saying is 4 marking the close or banging the close, people -- 5 or can try to affect -- submit trades with the 6 only purpose of effecting the price and to me 7 where I -- where I naturally take that is they 8 have ulterior motives. Perhaps they have a 9 derivative position elsewhere that would benefit 10 to the extent that the price moved in the 11 direction that they're equity trades directed the 12 closing price. And I don't -- I didn't hear you 13 specifically take that next step, but that's a 14 logical thing. I can't think of anybody else -- 15 any other reason why anybody would want to submit 16 trades, you know, logically want to submit trades 17 for the purpose of affecting a -- the only purpose 18 is to effect the price -- 19 Q. I think you're right? 20 A. -- unless they had ulterior purposes 21 for that. 22 Q. I think you're right. My -- my 23 understanding is at least sometimes the purpose of 24 doing it would be to influence a derivative 25 position. 86 1 So, given that we've come to that 2 understanding at least, would you agree with me 3 that marking the close is another instance in 4 which a trade would be legal or illegal, depending 5 on what the trader's purpose was? 6 A. Well, no, I'm not sure I can agree on 7 that. 8 Marking the close is -- at least as I 9 thought we described it, was clear. It was you 10 submit trades at the end of the day with ulterior 11 purposes. 12 But I -- I think you and I can agree 13 that, you know, that, you know, it's possible to 14 manipulate the closing price with ulterior 15 purposes with the derivative position or whatever 16 is very different from, you know to the extent I 17 submitted a trade, you know, one second before the 18 market closed because I wanted to buy, you know, 19 Amazon stock. That's -- that's very -- that's 20 very different. And my trade to buy Amazon stock 21 could affect the closing price but the purpose of 22 that is different. The purpose is to own Amazon 23 stock. The purpose isn't to artificially inflate 24 a position elsewhere. 25 Q. Maybe then I'll try using your 87 1 language. 2 Would you agree with me that banging 3 the close is a situation in which the legality of 4 a trade depends on whether the trader had ulterior 5 purposes for making the trade? 6 A. I -- the -- the term "banging the 7 close" makes me feel a little bit uncomfortable, 8 but I -- I would say -- because I'm not sure 9 exactly what that means, but I would say 10 submitting trades near the closing of the market 11 or even submitting market on a closed trades -- on 12 the exchanges you can submit a trade I think it's 13 by 3:50 and you're guaranteed the closing price. 14 But closing -- submitting trades near -- at or 15 near the end of the day can be viewed as 16 permissible or -- or not permissible. 17 Obviously there's a lot of trading 18 activity that takes place at the end of the day, 19 all of which could affect, price and most of it is 20 deemed to be perfectly permissible. But, I can 21 imagine some situations, one of which I think you 22 just articulated, that it may not be permissible 23 by the SEC. 24 If -- if somebody's submitting massive 25 large volume of trades with the sole purpose of 88 1 driving up some illiquid stock because they have 2 a -- you know, a -- in options that has huge gamma 3 exposure to it and they want to drive that up, I 4 would -- I would see that as -- I would imagine 5 that that would be something that attorneys or 6 securities attorneys may be quite concerned about. 7 Q. Circling the loop on this, then, would 8 you agree with me that in the wash trade context 9 and the marking the close context -- (network 10 interference) to whether it's permissible or 11 impermissible. 12 A. I'm sorry to do this to you again, 13 Damon, but you cut out. 14 Q. Closing the loop on the wash trade 15 conversation and the marking the close discussion, 16 would you agree with me that these are both 17 contexts in which a trader's intent can matter to 18 the SEC in determining whether a trade is 19 permissible or impermissible? 20 A. I - I think that we can agree that 21 there is wash trading that the SEC -- that the SEC 22 deems to be permissible or doesn't object to; 23 there is wash trading that it deems not to be 24 permissible; there is trading activity at the end 25 of the day that the SEC may deem permissible, and 89 1 there is trading activity at the end of the day 2 that the SEC may deem not to be permissible. 3 Q. And the dividing line between 4 permissible and impermissible in each instance is 5 what the trader's intent was, right? 6 A. "The trader's intent was. 7 I'm not sure if that's the only 8 dividing line. Again I'm not an attorney. So I 9 do know that that would be something that the -- 10 that could be something or that is something that 11 the SEC would be interested in, but I suspect it 12 may be a little bit more nuanced. But again I 13 don't know. That would be a better question for 14 somebody else. 15 Q. In your view, in making trades, should 16 a trader take account of the effect of his trades 17 on the wellbeing of other market participants? 18 A. "Could a trader take into the well" -- 19 Well, I'm not sure I understand the 20 question, what wellbeing means, but I do believe 21 that, to the extent that there are competitive 22 markets, some traders have an advantage and they 23 are successful and some traders are not successful 24 in their -- their trading activity. But I don't 25 think -- and I think traders are supposed -- 90 1 they're -- 2 You know, I know when we hired Alan 3 Chen -- I -- I guess we can speak to that -- when 4 I guess it was I guess LSE Capital Management 5 engaged Alan -- I believe it was LSE; I'd have to 6 review the agreements -- but our intent was -- or 7 our strong desire was for him to look at for our 8 best interests. And to be fair I do that with 9 other, you know, other service providers. For 10 instance, my accountant, I think my accountant, 11 his objective is to look out for my family's best 12 interests, and not the welfare of the -- the 13 country generally. 14 Q. Well let's -- yeah, let's take a 15 hypothetical. 16 Let's imagine that Powhatan had come 17 across an unusual, an unexpected trading 18 opportunity that they thought might yield $100,000 19 in profit, but it thought that, by making the 20 trade, it might inflict $1,000,000 of economic 21 harm on other market participants. 22 Do you understand the hypothetical? 23 A. Not really. 24 Q. What part of it don't you understand? 25 A. I don't know what economic harm is and 91 1 I can't understand a situation -- I thought the 2 power markets were a zero sum game, so I don't 3 understand how one entity can make 10X the amount 4 that -- or make -- lose 10X the amount that 5 somebody else makes. 6 Q. Well, let's -- let's imagine if the 7 trade has rolling blackouts. I'm purposely not 8 trying to present you the specific event. I'm 9 asking you more as a philosophical matter. 10 Can you just imagine a situation where 11 somebody came to you with and said, "Mr. Gates, 12 here's an opportunity to make $100,000 but I'm 13 concerned that the amount of money that we make is 14 going to be small in proportion to the amount of 15 market harm that we might cause to other market 16 participants". 17 Do you understand that hypothetical? 18 A. Not fully. I -- I don't -- yeah, I 19 don't understand that -- that hypothetical and I'm 20 not -- it's -- it's got -- it's got -- it's to be 21 a little more nuanced than that. But I don't -- I 22 don't understand it. 23 But if you're asking would I submit -- 24 would I want to be involved in business activities 25 to make $100,000 that caused brownouts or 92 1 blackouts, the answer would be no, if that's -- if 2 that's your question. But beyond that I'm not 3 sure I'm understanding your hypothetical activity. 4 Q. Well let's go with -- with that 5 actually. 6 A trade that you thought very well 7 might make money for Powhatan that also might 8 cause brownouts or blackouts. 9 Do you understand that hypothetical 10 situation? 11 A. I do but the caveat that I think 12 trades -- I don't think -- this is very 13 hypothetical and I don't think trades -- I'm not 14 the aware of any ability that traders have to -- 15 to cause brownouts and blackouts. 16 More -- moreover it's my 17 understanding -- and I'm not a -- a policy guru -- 18 but it's my understanding that trading activity by 19 and large could actually do the -- have the 20 opposite effect, that it would reduce the chances 21 of brownouts and blackouts. 22 So -- so you're flipping everything on 23 its head here. 24 Q. Okay. Do you understand the situation 25 I'm presenting to you as a hypothetical that may 93 1 never exist? I'm just trying to get us to 2 understand a hypothetical situation in which a 3 trade might be profitable and it might also create 4 widespread market effect such as brownouts or 5 blackouts? 6 Can you understand the hypothetical 7 situation -- 8 A. I think can understand. 9 Q. -- as I described it to you? 10 A. Yes. 11 Q. Okay. I think you said a moment ago 12 that you would not want to be a party to a trade 13 that might cause brownouts or blackouts. 14 Is -- is that what you said or did you 15 put it differently? 16 A. Yeah. I think that if -- in the 17 situation that you had described, that if I knew 18 in advance would I -- would I submit a trade where 19 we could make a hundred -- where I individually or 20 whatever could make $100,000, but it would cause 21 brownouts or blackouts, that would be a business 22 decision that I -- would be easy for me and I 23 would not want to pursue that. 24 Q. Why? 25 A. It's just not something that I would 94 1 want to engage in. It wouldn't be worth it to me. 2 Q. Is -- is that because of an ethical 3 standard that traders are supposed to abide by or 4 a personal philosophy or something else? 5 A. So, again, I don't think it's -- as I 6 understand it there's no ethical standards for 7 traders that they have to abide by that. It's 8 just a personal standards that I would have. 9 Q. You personally then have a personal 10 standard to take the health of the market into 11 account when making trading decisions? 12 A. In this hypothetical example, that 13 would be something that I would say, yeah, I 14 would -- I would not do. 15 I don't know if that can be -- it's 16 such a hypothetical I don't think it's a 17 real-world example that you had described, but 18 yeah, that's -- that's a true statement. 19 MR. TAAFFE: Why don't we take a 20 five-minute break at this point if that's okay 21 with you guys. We can go off the record. 22 THE LEGAL VIDEO SPECIALIST: Going off 23 the record, 11:19 a.m. This ends media file 24 number two in the deposition of Kevin Gates. 25 (Recess taken.) 95 1 THE LEGAL VIDEO SPECIALIST: We are 2 back on the record 11:27 a.m. This begins media 3 file number three in the deposition of Kevin 4 Gates. 5 You made proceed, Mr. Taaffe. 6 BY MR. TAAFFE: 7 Q. Mr. Gates, shifting gears a little bit 8 and bringing your attention back to 2010, did you 9 have an understanding of something called marginal 10 loss surplus allocation, or MLSA? 11 A. I did. 12 Damon, I did have additional thoughts 13 as it related to our previous discussion on the 14 hypothetical example. 15 Q. Sure. 16 A. I'm happy to -- I'm happy to share them 17 if you would like or we can just move on. 18 Q. Sure, let's take a step back and I will 19 open the floor to you to expound on your answer. 20 A. So, hypotheticals are -- are really 21 dangerous because they're just that, they're 22 hypotheticals, but I -- I stand by my statement 23 that that that would not be business activity that 24 I would want engage in. I could understand in 25 this hypothetical example why somebody else may 96 1 want to engage in that beyond just the -- the 2 financial return. 3 To the extent that there was a 4 structural problem in the market, a major, major 5 problem and if I could -- if somebody could submit 6 trades and do a little bit of a brownout to alert 7 our highlight a structural problem to -- to avoid 8 a possible major blackout, you know, next month, 9 that may be a very reasonable and responsible 10 thing to do, is to highlight a structural problem 11 and have some rolling brownouts to get a situation 12 changed where the market wouldn't endure a 13 blackout at some later point. 14 Q. Instead of doing a brownout, though, 15 wouldn't it be better just to let the RTO or ISO 16 or FERC or someone know about the problem? 17 A. It could be. That -- that would be 18 another path to do it. 19 I do know, at least in my experience, 20 with these markets, that times the -- and the 21 government generally, and I guess just 22 bureaucracies that they don't always process 23 information or -- or react or -- or take things 24 seriously. So -- or, yeah. 25 Anyway, I -- I could imagine a 97 1 hypothetical situation where a trader would say, 2 "Hey, the FERC's not listening to me, the FERC -- 3 the FERC is too bureaucratic, they're not 4 responsive, they're not dynamic," I could do a 5 trade tomorrow that would cause a little bit of a 6 brownout to prevent a -- to highlight this issue, 7 to bubble it up to the top of the priority list so 8 that we don't have a blackout next month. 9 Q. Moving back to MLSA in 2010 and your 10 understanding of it -- do you know what I'm 11 talking about when I say MLSA? 12 A. I do. We -- we referred -- we can 13 refer to them as MLSA, TLC, rebates, whatever 14 you -- whatever you like. 15 Q. Overcollected losses, same thing, SEL? 16 I'm sorry, you -- audio connection 17 again. Yes, those are terms you're familiar with? 18 A. Yes. 19 Q. Okay. How would you explain what those 20 things are, the MLSA, OCL? 21 A. MLSA and T -- T -- what did you -- TCL? 22 TLC. 23 Q. Choose your term. I think we -- I 24 think we agree that those acronyms are all the 25 same thing. 98 1 A. TLCs. Yes, transmission loss credits, 2 marginal loss surplus allocation. Basically 3 there's a discontinuity between the -- on the grid 4 as it reagents to marginal losses. All the -- the 5 prices are marginal prices whereas the losses are 6 average losses, so it results in an overcollection 7 of losses. And there's a -- what I think I've 8 described it as a pot of money that needs to be 9 allocated. 10 Q. When did you first hear of this thing 11 called MLSA or TLC? 12 A. I think you said when did I first hear 13 of it. I'm not sure. But I -- if that was your 14 question I believe it was 2009. But again this 15 is -- we're going years back. But I believe it 16 was 2009 that I had first heard of this. 17 Q. Did you first hear of it from Alan Chen 18 or in some other way? 19 A. I don't recall but I do know that I had 20 an economic exposure to another investment called 21 Huntrise Energy Fund that received a retroactive 22 rebate for these MLSA in I believe that was 2009. 23 Q. And at the time the Huntrise 24 investments were directed via a multiplier of Alan 25 Chen's HEEP Fund investments, right? 99 1 A. I believe that's correct. 2 Q. What is your understanding of where 3 MLSA funds come from? The payments that are made 4 to you, where do those payments come from? 5 A. Where do they come from? They came 6 from -- specifically they came from PJM. 7 Q. But is it PJM's money or is it PJM 8 acting as a passthrough between some other entity 9 and you? 10 A. So I don't know the economics at PJM. 11 If I were to speculate, they -- you know, are you 12 asking did it come from PJM's capital account? 13 I -- I don't know. I don't know where those 14 monies came from. 15 Q. Well, let's say that Huntrise put out a 16 trade and was awarded MLSA. Who if anybody loses 17 out on MLSA from your understanding? 18 A. "Loses out". 19 Who is -- so as I understand it it's 20 a -- it was a competitive marketplace and it would 21 be anybody else who was participating in that 22 marketplace. 23 Q. So PJM makes the payments but you 24 understand that PJM is only collecting payments 25 from certain traders and distributing them to 100 1 other traders. 2 Is that your understanding? 3 A. Not just traders necessarily. Also 4 there are other markets participants in PJM 5 besides traders. There are asset owners as well 6 for instance. 7 Q. Do you understand that for each trading 8 day there's a finite amount of MLSA that's divided 9 up among UTC market participants? 10 A. That's divided? So I don't -- I'm not 11 sure if I'm interpreting your question right, but 12 I don't think that that's necessarily the case. I 13 think that the MLSA isn't -- I don't know if that 14 implies that MLSA is divided by -- up by UTC 15 market participants. There are other market 16 participants at well that are vying for those 17 rebates. 18 Q. Can you say more about what you mean by 19 vying for those rebates? 20 A. There are other market participants 21 who -- it would effect economic wellbeing, how 22 those rebates are allocated. 23 Q. So for example if Huntrise or HEEP Fund 24 were to receive more MLSA on a given day, there is 25 some other market participant that is receiving 101 1 less on the same market day, right? 2 A. Yeah, when you say received, I think 3 it's awarded. I don't know if there's money to 4 really receive on the market day. But it's monies 5 that are awarded I believe that that's generally 6 the case. But I'm not -- I'm not a power engineer 7 by nature, so I don't know exactly how the 8 mechanics work and I don't know the exact 9 structure at PJM in terms of the accounting for 10 it. 11 But as a general rule of thumb, I 12 believe that to be true, but the devil is in the 13 details and it would be literally a deep dive to 14 confirm that -- if that were actually indeed true. 15 Q. Do you have an understanding that if 16 Powhatan made no UTC trades in 2010 that other 17 market participants would have received more 18 transmission loss credits than they actually did? 19 A. I believe that be to the case. I 20 believe that there was -- it was a -- a 21 competitive market where people were vying for -- 22 competing in that market and as I had mentioned 23 earlier, I do think it's generally, holistically a 24 zero sum game in response to your -- your 25 hypothetical question. 102 1 So I believe that to be true. 2 Q. What's your understanding of why PJM 3 has market participants compete for refunds or 4 MLSA? 5 A. I'm sorry, what's my understanding of 6 why? I mean -- I mean, the specifics are I 7 believe it was in the tariff or there was some 8 FERC order that that was why. The governing rules 9 dictated that that was the case. 10 Q. Do you understand that to make a UTC 11 trade Powhatan was required to reserve 12 transmission capacity? 13 A. I don't know -- I think -- I -- I don't 14 know that it was required. I wasn't -- I don't 15 know the specifics. The market has changed a lot 16 over the last 11 years but I know that it did. I 17 don't know that it was required to. I'm open to 18 the possibility that it was -- it was -- a trader 19 could have submitted a UTC trade without reserving 20 transmission through -- Oasis, but I -- I don't 21 know. 22 Q. As far as Powhatan's trades go, is it 23 your understanding that all of its UTC trades were 24 accompanied by transmission capacity reservations? 25 A. I don't know. I -- I don't know. 103 1 Q. Are you aware of any UTC trade that 2 Powhatan successfully put on that was not 3 accompanied by a transmission capacity 4 reservation? 5 A. "Successfully put on". 6 I -- I -- I'm not aware, no. 7 Q. Do you have an understanding that 8 transmission capacity is a finite resource? 9 A. I'm not sure I understand the question 10 but, no, I don't think transmission capacity is 11 necessarily finite. I think it's -- it's possible 12 to add more -- a lot more transmission lines and 13 increase it. Perhaps -- I mean, I don't know 14 finite. I don't know if you can do it -- an 15 infinite amount of transmission but transmission 16 can be added. 17 Q. Well, I completely agree with you but 18 let's just take a particular day out of a hat in 19 2010. It doesn't matter what day it is. 20 On any given day transmission capacity 21 is finite, right? 22 A. "On any given day". 23 I -- I don't know. I believe that may 24 be the case but I believe that it's also -- you 25 know, things are -- things are dynamic and 104 1 their -- their transmission lines go in and out 2 every single day. So on any single day it would 3 be possible to add in additional transmission 4 capacity to the marketplace. 5 And I don't know -- I mean, after it 6 was added, maybe you're suggesting it was 7 determined at that point that it's -- I think it's 8 always possible to add additional transmission or 9 additional outages. 10 Q. Do you have any understanding that it's 11 possible for one market participant to reserve so 12 much transmission capacity that further market 13 participant might not be able to reserve any of 14 it? 15 A. I don't -- I don't know the mechanics 16 of reserving transmission capacity like -- yeah, 17 I -- I don't know the specific mechanics of it. 18 I do believe that transmission 19 capacity -- I believe -- I'm not sure, but I 20 believe that it was a -- supposed to be a 21 competitive marketplace. 22 Q. Competitive meaning some people win; 23 some people lose? 24 A. Some people win and some people lose 25 and that there were incentives perhaps for people 105 1 to -- to set their alarm to get up early and 2 reserve transmission as opposed to sleeping in 3 late and roll out of bed late. 4 Q. And if they sleep too late they may not 5 get any transmission capacity if somebody else 6 takes a lot of it, right? 7 A. Yeah, I think the -- yes. That could 8 be the case. I don't know the specifics of what 9 was involved in reserving transmission capacity in 10 2010. Again it was 11 years ago. Moreover, I -- 11 I don't have any kind of direct experience in 12 that -- in that process. 13 Q. Back in 2010 did your understanding of 14 transmission capacity exclusively (sic) from Alan 15 Chen or did you have other sources of your 16 understanding? 17 A. As an initial matter I'm not even sure 18 I -- back in 2010 if I had any understanding of 19 transmission capacity. To the extent I had it, it 20 could have come from Alan Chen or other handful of 21 people that we had engaged. 22 But I don't recall having any -- I'm 23 not even sure I had any specific understanding of 24 transmission capacity at that point. 25 Q. When did you first meet Alan Chen? 106 1 A. When did I meet him? I assumed when 2 you say meet, you're not necessarily in person, 3 just meet online or elsewhere? I think -- 4 Q. Yeah. Yeah, become acquainted. 5 A. I think it was 2007. I met -- I met -- 6 I believe this was covered in a deposition that I 7 gave a decade ago to the -- the FERC. So whatever 8 answer I gave, the ones we cited as Exhibits 1 and 9 2, so I feel more comfortable to the ones that I 10 gave at that point than the ones I'll give you 11 right now. 12 Q. What caused you to decide to team up 13 with Alan Chen on power trading? 14 A. "To cause me" -- well, "team up". 15 So it was -- I don't know if I can 16 answer that specific question, but I think what 17 you're asking is why didn't -- Hunt -- I think it 18 was Huntrise Energy Fund was the first fund that 19 Alan traded on behalf of, and what was the 20 motivation for Huntrise Energy Fund to sign signed 21 an agreement with HEEP Fund to have HEEP Fund 22 trade on behalf of Huntrise Energy Fund? 23 Is that a fair interpretation of your 24 question? 25 Q. That's -- that's fair. What's the 107 1 answer to that question? 2 A. The -- as I recall it was multifaceted. 3 But it was, one, he had experience. He was 4 educated and had professional experience and 5 seemed knowledgeable. And -- and secondly he was 6 trading his own money at the time. So -- (network 7 interference). 8 We just got big feedback there. 9 But I -- the -- he was trading his own 10 money and we didn't have -- Huntrise Energy Fund 11 didn't have the resources to do comprehensive due 12 diligence. We didn't really -- it wasn't overly 13 familiar with the marketplace and our -- kind of 14 our -- our risk control was more if he's putting 15 HEEP Fund's capital at risk, which we believed 16 he -- that it was his money or his family's money, 17 then we felt more comfortable. Because typically 18 in the -- in the investment advisory space what's 19 important is making sure that people -- people's 20 interests are aligned and it's easier -- people 21 unfortunately do different things with other 22 people's money than they will do with their own 23 money oftentimes in this space, and we felt, okay, 24 he's doing it with his own money; we don't have to 25 do comprehensive due diligence and as long as 108 1 he's -- we're tracking his money we can just -- 2 that the fund could invest and not really fully 3 understand what it was doing. 4 Q. What -- in terms of alining interests, 5 it seems to me like another way you could align 6 interests is just by awarding a share of the 7 profits to the trader; that they could do that, 8 too, right? 9 A. Yeah, that doesn't do a good job 10 because that creates perverse incentives. It 11 doesn't do a perfect job. There's no way to 12 perfectly align interests. 13 But an interest -- an issue that that 14 has is that he could what we call swing for the 15 fences, take really, really high-risk bets with 16 the hope of making a lot of money and if so he 17 gets paid handsomely; if he uses, you lose all 18 your money, but it doesn't really cost him 19 anything. 20 So, yeah, paying them a percentage of 21 the profits in some ways also aligned interests 22 but it also has a perverse ability to misalign 23 interests. 24 Q. Was Alan Chen the first trader that 25 Huntrise partnered with on one of these multiplier 109 1 arrangements? 2 A. So when you speak of Huntrise I assume 3 we're speaking of Huntrise Energy Fund, LLC. The 4 answer is I don't believe so but I'm not certain. 5 Q. In your trading background prior to 6 Alan Chen, had you partnered with other 7 third-party traders under relationships involving 8 a multiplier similar to the one between Huntrise 9 and HEEP Fund? 10 A. A multiplier for every one -- I'm 11 sorry, the multiplier is for every megawatt he 12 trades he trades X for us? When you say 13 "multiplier," is that what you're referencing? 14 Q. Yes, exactly. 15 A. I'm not sure. I believe so. 16 That's a -- that's a common way to -- 17 to the extent you have separate accounts. Another 18 way -- I mean, this is kind of a -- a backdoor way 19 to do that. If you have a -- a manager and he -- 20 and she's managing, you know, $100,000 of her own 21 money in a fund, I could invest in that fund 22 directly with $500,000 and I would get a 5X 23 multiplier and be co-invested with them and 24 structure it to the extent that they wanted to 25 redeem, I would also have the ability to redeem as 110 1 well. So I could get a multiplier arrangement 2 that way as well. Either consciously or for that 3 matter unconscious -- subconsciously you could 4 have a multiplier. 5 (4/10/8 email from Kevin Gates to Alan 6 Chen, Bates stamped POW_7711 to 7714 was marked K. 7 Gates Exhibit 7, for identification.) 8 BY MR. TAAFFE: 9 Q. If I'd just ask you to -- to turn to 10 Exhibit 7. Maybe this will concrete it a little 11 bit here. This is page 21 of the PDF. 12 Will you let me know when you get 13 there? 14 A. I'm there. 15 Q. Okay. This is an email from you to 16 Alan Chen on Thursday, April 10th, 2008. Do you 17 agree with me? At least the top one is? 18 A. April 10th, 2008, yes. 19 Q. The email says, "Alan, your response to 20 number two raises an interesting point. As the 21 agreement would stipulate, our account would need 22 be to traded identically to yours". 23 Do you see that? 24 A. Yes. 25 Q. Was this arrangement that you're 111 1 discussing the first time that TFS or Huntrise 2 partnered with a trader to have your accounts 3 traded identically with the trader's own accounts, 4 or was that something you had done before? 5 A. So, I don't recall if it would -- had 6 been done before. This -- this is over 13 years 7 ago and you're asking for things before that. 8 To the extent it was done, it would be 9 in the two arrangements that we described where we 10 would co-invest with another fund or set up 11 separate accounts with that arrangement. 12 But I -- I don't recall if TFS or 13 Huntrise had those arrangements previously. 14 Q. Have you had an arrangement like this 15 one with Elmagin? 16 A. No. 17 Q. So Elmagin has partnered with outside 18 traders to have an Elmagin account traded 19 identically with the trader's own account? 20 A. That's correct. 21 And when -- when we -- internally -- 22 it's an awful name. We pronounce it Elmagin 23 Capital -- I assume when you say Elmagin, you're 24 talking about Elmagin Capital, LLC. That's not 25 your fault; it's our fault. It's just an awful 112 1 name. 2 But no -- 3 Q. That's what I'm referring to. I'll try 4 to get it right. 5 A. I didn't hear you, Damon. I'm sorry? 6 Q. Yes, Elmagin is the -- LLC is the firm 7 that I'm referring to and I'll try to get it 8 right. 9 If you look again at this email that's 10 Exhibit 7, you say, quote, "We have a sense of the 11 risk in your account by looking at the daily 12 numbers and I know that you described to us the 13 trading that you were doing so that gives some 14 insight". 15 What had Alan Chen described about the 16 trading that he was doing? 17 A. Damon, is it okay if I take a moment to 18 review the entire email thread? 19 Q. Absolutely. 20 (Witness peruses document.) 21 A. All right. Thank you. 22 So I think the question was what did he 23 tell us prior to this -- regarding his trading at 24 Huntrise Energy Fund in April of 20 -- 2008. 25 Q. That's right. 113 1 A. I don't recall beyond -- I mean, I can 2 point to some things here in the email thread that 3 it looks like he was telling us. As -- as it 4 turns out I think he gave us incorrect 5 information. He did say that -- that FERC power 6 marketing requirement, that you need a FERC power 7 marketing requirement for UTC trades? It looks 8 like he told us about that, but I actually believe 9 that's not -- it wasn't correct information at the 10 time. 11 I suspect he -- you know, we obviously 12 knew he was trading at PJM. We might have known 13 that he was trading in the -- the day-ahead 14 market. But beyond that I -- I don't recall at 15 this point specifically what if anything he had 16 told us. 17 I do note that -- I don't think -- I 18 don't believe I -- I don't believe that he shared 19 a lot as an initial matter. 20 In April of 2008 I had a two-year old 21 child and a newborn at home and I had a full-time 22 job and our company, TFS, the credit crisis had 23 already hit, so we were incredibly busy and 24 stressed at the office. 25 Q. As you sit here today you don't have 114 1 any recollection of what he told you back then 2 apart from what you're reading in this email? 3 A. "What he told me". 4 So when you say "me" -- no, I don't, 5 but I would caveat it that he may have had -- he 6 may have had conversations with other people as 7 well. I believe specifically he had an initial 8 conversation with Larry Eiben. 9 (HEEP Fund and TFS Advisory Agreement, 10 Bates stamped POW_0071 to 0073, was marked K. 11 Gates Exhibit 8, for identification.) 12 BY MR. TAAFFE: 13 Q. If you turn to Exhibit 8, please, this 14 is PDF page 25. Let me know when you're there. 15 A. I'm there. 16 Q. This is an advisory agreement between 17 HEEP Fund, which is Alan Chen's fund, and TFS 18 Capital it looks like entered into on May 1st 19 2008. 20 Do you agree with me? 21 A. Yes. 22 Q. Was this the first time that any of 23 your funds contracted with any of Alan Chen's 24 funds? 25 A. I'm very -- I believe, yes. I'm as a 115 1 confident as I can be that that's the case, given 2 the fact that this was 13 years ago. 3 Q. All right. It's my belief that it is 4 but just making sure. 5 All right, you were not familiar with 6 MLSA when you signed this agreement, right? 7 A. I would be surprised if I was. Yeah, I 8 don't believe that I was. I believe when I told 9 you -- we spoke earlier in this deposition I think 10 I first learned about it in 2009, but I'm not -- 11 I'm not certain. 12 But I don't recall specifically what -- 13 what I knew about the marketplace at that point. 14 Q. Assuming that you didn't know about 15 MLSA when you signed this, it would follow that 16 your understanding of the trading strategy had 17 nothing to do with MLSA, right? 18 A. That's true, yes. 19 Q. The agreement here has a multiplier of 20 2.5. Do you see that? It looks like the third 21 bullet point. 22 A. Yes. 23 Q. And just so we understand each other, 24 quote, "This means that for every megawatt that 25 Heep trades for Heep account, Heep will place 116 1 trades for 2.5 megawatts in TFS' account". 2 Did I read that correctly? 3 A. I believe you did. 4 Q. All right. So throughout the 5 deposition, when we refer to multipliers, this is 6 the -- the concept that I'm referring to, okay, 7 where Alan Chen's account puts on a megawatt and 8 then the multiplier determines how much he puts on 9 for Huntrise or -- or Powhatan. 10 Can we agree on that language? 11 A. Sure, yes. 12 Q. Did you view 2.5 as a large or a small 13 multiplier? 14 A. I don't recall. 15 Q. Looking back on it today, would you 16 consider it large or small? 17 A. I -- a multiplier, I -- I guess it's -- 18 there's two points here. One, when I think about 19 the multiplier and -- and how you want me to 20 assess it size, one is our exposure relative to 21 Alan's, and two is our exposure on an absolute 22 basis. 23 So, our exposure relative to Alan's, I 24 don't -- I don't know how I would describe it. 25 For either -- I guess for either situation I don't 117 1 know how I would describe it. 2 I think I would describe it, you know, 3 a reasonable and normal allocation, given the risk 4 tolerance of TFS and our understanding of 5 Alan's -- or HEEP Fund's trading acumen. 6 Q. Let's talk about that distinction 7 between TFS's absolute exposure versus relative 8 exposure. 9 What would cause TFS to have a greater 10 absolute exposure to a certain type of trade? 11 What's the calculus? 12 A. I'm sorry, are you asking me -- maybe 13 I'm being obtuse but I think the calculus is that 14 multiplier. 15 Q. No. I -- I'm actually working off of 16 your last answer where you said there were two 17 distinct concepts and I'm trying to tease them 18 out. 19 I think the first you said is that TFS 20 may have an absolute exposure to a certain type of 21 trade, an absolute size of investment. And I 22 think you said the other part of the calculus is 23 the relative investment or the multiplier. 24 So TFS could have a high or low 25 absolute exposure to a type of trade or a high or 118 1 low multiplier compared to Alan's, that those are 2 independent somewhat. 3 Do you agree with me? 4 A. I'm not sure they're independent. I -- 5 I think they're -- they're directly related. But 6 I do agree that those are two kind of frameworks 7 that one could evaluate -- that I used to answer 8 your question about this multiplier, was it high 9 or was it low, I was using two frameworks to try 10 to answer that question for you. 11 Q. Sure. They're two distinct concepts 12 and I'd like just to understand each one of them a 13 little more. And let's talk about the first one, 14 absolute exposure. 15 In terms of TFS' absolute exposure to a 16 certain type of trade or market risk, what are the 17 factors that cause you to want to have a greater 18 absolute size of exposure for the type of trade or 19 market risk? 20 A. So I don't know -- I can speak 21 generally about it, not necessarily TFS -- well, 22 TFS, it's unfortunately decisions are made by 23 committees, so it's individual personalities and 24 dynamics, and, you know, things like that. 25 Committee by decision can be difficult. But, you 119 1 know, moving kind of -- you know, even TFS had 2 kind of bureaucratic aspects to it. But on a very 3 high level, in terms of capital allocation, you 4 would -- one could consider allocating more money 5 to an investment that had high expected returns, 6 risk-adjusted returns for that matter, and return 7 stream that was uncorrelated to other investments 8 that it had. 9 In general it's good to kind of put 10 together a diversified investment portfolio so, 11 you know, if -- if one asset class or one 12 investment doesn't do well, hopefully you have 13 other investments that actually do do well. 14 Q. Now, talking about the -- the relative 15 exposure or the -- the multiplier, what would 16 cause you to want to have a greater or lesser 17 multiplier on a given relationship? 18 A. Again the -- some of these issues 19 before the -- there can be kind of a bureaucratic 20 or committee decision by committee aspect to it. 21 It's also a function of the -- the expected 22 risk-adjusted returns and the -- the correlation 23 to other investments. And it also in this case 24 may be -- and it's hard to really assess 25 somebody's -- somebody's risk tolerance, but you 120 1 can try to look at their kind of risk tolerance 2 and in this case, you know, kind of capital -- 3 capital activity or whatever and kind of line ours 4 up and kind of -- if -- if I say, okay, Alan's 5 really risk adverse and he doesn't have a lot of 6 money, and I'm willing to take a little bit more 7 risk and we have a little bit more capital, maybe 8 I'll increase my exposure, have a higher 9 multiplier. 10 Q. The advisory agreement later in that 11 same bullet point says, "This multiplier may only 12 be altered by mutual content between TFS and 13 Heep". 14 What would cause the multiplier to 15 change over time? 16 A. I mean, I'm -- I'm sorry, is the 17 question can I give you a hypothetical example of 18 why TFS and Heep may choose to change this -- 19 could have chosen to change this multiplier? 20 Q. Sure. What -- what would -- you 21 included a term to allow the multiplier to change, 22 and I think the multiplier did change. 23 Just philosophically, what would drive 24 your decision to change a multiplier? 25 A. Any changes to the -- any of those 121 1 factors that I listed earlier, a change in the 2 expected returns or, you know, risk-adjusted 3 returns, that can be if you get more comfortable 4 with a trader or you better understand, or kind of 5 the risk-return profile of the marketplace gets 6 more attractive, if, you know -- if my perception 7 of the relative risk changes. If Alan's house 8 gets struck by lightning and he incurs a 9 significant -- or HEEP's office I guess I should 10 say, not Alan's, but whatever, if his risk profile 11 decreases significantly and mine hasn't changed, a 12 possible logical thing would be to increase this 13 multiplier so that I can get a similar type of 14 exposure to what he has. He's reduced his risk; 15 my risk profile can stay the same. Or, you know, 16 changes to the bureaucratic process, or -- or 17 anything. 18 Or even capital allocation. If -- if 19 he -- if TFS had an investment portfolio and it 20 perceived some of those other investments not to 21 be doing well, or some of them had matured, it 22 could reallocate its account and assume more risk 23 here. 24 You need to look holistically at the 25 investment portfolio. But it could be any of 122 1 those things. Or to be fair it could be none of 2 them. It could just be totally artificial. It 3 could be -- may, you know -- I'm not sure that 4 there was a lot -- I'm not sure that there is 5 necessarily a lot of signs behind the 2.5. It's 6 not apparently a magic number and that necessarily 7 is not the right number. It's probably not the 8 right number. 9 Q. Okay. At the beginning of your 10 relationship with HEEP Fund, that is in May 2008, 11 what did you understand the trading strategy to 12 be? 13 A. I -- I don't recall, but it says in -- 14 on the first bullet point it says that he's 15 "authorized to submit virtual trading day-ahead 16 Inc and Dec trades as well as up-to-congestion 17 trades". 18 So I think that I was -- I can 19 assume -- I assume that he was participating -- 20 oh, and specifically prohibited from placing FTRs. 21 So it was kind of a day-ahead type of 22 product specifically to PJM. 23 (7/22/08 email from Kevin Gates to Chao 24 Chen, Bates stamped POW_8996 to 8997, was marked 25 K. Gates Exhibit 10, for identification.) 123 1 BY MR. TAAFFE: 2 Q. If you'd turn to Exhibit 10, please, 3 which is page 33 of this PDF. 4 A. I'm there. 5 Q. All right. This is an email chain from 6 July of 2008. 7 Do you agree with me as far as that 8 goes? 9 A. Yes. I just scrolled through it. July 10 of 2008. 11 Q. Great. If you turn to page two of the 12 exhibit, there's an email dated 12:01 p.m. It 13 begins on page one but the substance is on page 14 two. It's an email from you to Alan Chen, July 15 22nd, 2008. 16 Do you see that? 17 A. I do. 18 Q. The second paragraph begins, and this 19 is you writing, "A general question for you. In 20 my simple understanding, you are betting on 21 congestion in PJM". 22 What sort of understanding did you have 23 about the nature of that type of investment? 24 A. As I sit here today, the only thing I 25 can say is simple -- it appears that I had a 124 1 simple understanding. 2 Q. At this point if you were asked to 3 describe what your understanding was to someone, 4 what would you say? 5 A. If I were to describe -- as I sit here 6 today, what would I describe my understanding of 7 in 2000 -- I'm sorry, in 2021 how would I describe 8 my understanding now back in 2008? 9 Is that right? 10 Q. Yes. Or to put it differently -- yes. 11 So when you wrote these words, what was 12 your understanding? If you don't recall, you 13 don't recall, but if you do I'd like to understand 14 it. 15 A. No, I don't recall what my 16 understanding was at the point in time when I 17 wrote that email beyond what I wrote there where I 18 described it as simple. 19 Q. Were you concerned about downside risk 20 in this type of investment? 21 A. Yes. 22 Q. Are you someone, generally speaking, 23 who wants to understand the risks associated with 24 your trading positions? 25 A. There are situations where I do want to 125 1 understand the risks; there are situations where I 2 don't want to understand the risks. 3 Q. Can you say more about that? Why would 4 you ever want less information? 5 A. No, I would always want more 6 information but there's just not enough hours in 7 the day to get that information. 8 It seems that, you know, by way of -- 9 I'm inferring here, but it sounds like on July 10 21st, the day before this email, I -- I really 11 didn't have any understanding of the risk. I 12 didn't -- it doesn't even understand that I know 13 what -- what's going on. 14 Q. Is it fair to say that the -- the 15 larger a position you have, the more interest you 16 have in understanding the risks associated with 17 the investment? 18 A. Generally the larger -- not that a -- 19 that could be the case, but not necessarily the 20 case. 21 So there are different ways to control 22 risk. One way to control risk is to understand 23 it. The other way to control risk is to arrange 24 a -- set up an arrangement where you don't -- you 25 decide that you don't want to understand it, you 126 1 don't -- it's more efficient to align an 2 investment in a way such that you don't have to 3 understand it. So if -- again we talked about 4 allocating money. You know, I -- co-investing 5 with somebody and understanding the person and the 6 person's incentives and if you can line that up, 7 then, you know, it doesn't -- you can -- you can 8 proceed -- you may be able to proceed without 9 understanding the underlying risks. 10 I've over the years have been involved 11 with investments where I -- where I don't 12 understand the risks. And the reality is you 13 never -- it's not even possible to really 14 understand risk. There are what I guess they call 15 black swan events that happen all the time and you 16 try to get a better understanding but you never 17 really understand anything. 18 Q. But the larger a multiplier is the more 19 important it would be to you and your investors to 20 understand the strategy that was behind the 21 multiplier, right? 22 A. All else being equal -- that's -- 23 that's -- the higher the multiplier. There are 24 situations where that's the case, yes. 25 Q. In fact you told Alan Chen, didn't you, 127 1 that you could never ramp up investment with him 2 without knowing his trading strategy intimately? 3 A. I'm sorry, could you repeat that? 4 Q. Do you recall telling Alan Chen that -- 5 that you could never really ramp up your trading 6 with him without knowing his strategy intimately? 7 A. I -- I don't recall that exact 8 language. 9 I know that there was a positive 10 relationship between our knowledge of his 11 activities and -- eh, I don't even know if that's 12 true. We thought at the time that there was a 13 positive correlation between our knowledge of his 14 trading activities and our allocation. We 15 attempted that. I'm not sure if that actually 16 materialized. 17 (7/9/09 email from Kevin Gates to Alan 18 Chen, Bates stamped POW_7242 to 7246, was marked 19 K. Gates Exhibit 9, for identification.) 20 BY MR. TAAFFE: 21 Q. Would you turn to Exhibit 9, please. 22 A. I'm on the first page. I'm on page 28 23 of 134. 24 Q. Yes, this is Exhibit 9. It's an email 25 from you to Alan Chen June 9th, 2009. 128 1 Do you see that? 2 A. Yes. 3 Q. Well, I'll just read the first 4 paragraph, "Alan, we'd love to invest more. I 5 even sent out an email a week ago or so asking if 6 people were okay ramping up to four to one. 7 "I haven't heard back from everyone yet 8 but I know it's a tough sell as when people ask me 9 to quantify the risks, I say I don't really know. 10 "And I know that we could never -- I 11 know that we could definitely never really ramp 12 up, e.g., increase exposure to 30X, which I 13 believe you said was possible, without knowing 14 strategy intimately". 15 Do you see that language? 16 A. I do. 17 Q. Would you agree with me that it was 18 important to you to know Alan Chen's trading 19 strategy intimately before you ramped up your 20 multiplier? 21 A. No. 22 Q. What did you understand that language 23 to be when you wrote it? What did it mean? 24 A. That we wanted to learn more about his 25 fund and that we were attempting to increase more 129 1 in conjunction with trying to learn more about his 2 fund. 3 Q. So when you said we could definitely 4 never really ramp up without knowing the strategy 5 intimately, what did that language mean in terms 6 of what you need to know before you ramp up your 7 trading fund? 8 A. "What we would need to know". 9 I -- I don't recall. 10 Q. You don't recall what was in your mind 11 when you wrote these words? 12 A. I -- I don't -- I mean, I can read 13 the -- I can read the document, maybe not as well 14 as you, but I can read the document, but I -- I 15 don't recall what was going through my mind when 16 I -- when I wrote those words. 17 Q. All right. Is there anything that 18 would bring your mind back to that point, when -- 19 and let me just be more direct about it so we 20 understand each other. 21 I don't want you to guess. I don't 22 want you to -- to tell me you understand something 23 when you don't understand it. And I know it's 24 been 11 years. But we could find ourselves at 25 trial in this case sometime in the future, and if 130 1 we do and I ask you what this language means, I 2 want to make sure that you're not suddenly going 3 to tell me something different than what you're 4 telling me now. 5 So if you don't understand what it 6 meant, then okay. But is there anything that 7 would bring your mind back that might cause you to 8 say, if I asked you at trial, something that was 9 different than you are saying now about your 10 understanding? 11 A. So there very well could be and there 12 very well could be things that I'm not able to 13 tell you right now. So unfortunately I don't 14 think that there is a way to necessarily ensure 15 that I'm not going to be able to say something 16 different at trial than I'm saying now. 17 But, I do believe that the language 18 here says I don't really know what the risks are. 19 We are trying to -- to increase the -- I mean, we 20 were going to ramp up exposure to four to one. I 21 was trying to ramp up exposure four to one without 22 really understanding the risks. 23 Q. Do you think that when you wrote, "I 24 know that we could definitely never really ramp up 25 without knowing the strategy intimately," that 131 1 suggests that you were very interested in knowing 2 the strategy intimately? 3 A. I was certainly open to the 4 possibility, yes, to know the strategy intimately. 5 That's true. 6 Q. If somebody sent you a letter saying, 7 before we invest in more we want to know your 8 trading strategy intimately and we could never 9 ramp up without knowing the strategy intimately, 10 what would you understand that to mean? 11 A. That the person was wanting to 12 understand -- was considering -- would be open to 13 a relationship where the advisor provides full 14 transparency into their trading and the investor 15 allocated more money to that trader. 16 There's a weird dynamic in asset 17 management, and it probably comes as no surprise, 18 that there's an inherent rub here, because Alan 19 does not want to give -- doesn't want to tell us 20 his strategy intimately. 21 At this point TFS -- Alan was trading 22 out of the probably the spare bedroom of his 23 house. TFS was probably managing billions of 24 dollars and had, you know, maybe 25 employees, 25 including somebody with a PhD in computer science 132 1 and electrical engineering who was very interested 2 in this. So Alan would not -- would not be keen 3 on sharing that information because to the extent 4 he gave us the intimate details, he's basically 5 become irrelevant in the relationship. 6 Q. When I told you a minute ago I wanted 7 to try to prevent the situation where you remember 8 something at trial you don't remember now, what 9 sort of documents might cause you to remember what 10 you meant when you wrote, "I know that we could 11 definitely never really ramp up without knowing 12 the strategy intimately"? 13 A. "What sort of the documents". 14 Other emails that were sent at about 15 that time or around that time. I don't know if 16 there are notes. Yeah, I don't -- I'm sure there 17 are other things. I can't think of everything 18 now. 19 Q. If you go back to the previous exhibit, 20 which is -- 21 A. I'm sorry, what page? 22 Q. Exhibit 10, sorry, that is on page 33 23 of the PDF. 24 A. Yeah, I'm there. 25 Q. Let me know when you're there. 133 1 A. I'm there. 2 Q. All right. The second message down 3 from the top is one from Alan Chen to you, July 4 22nd, 2008 at 1:31 p.m. 5 Do you see that? 6 A. Yes. 7 Q. He says, "Hi, Kevin. Majority of my 8 trades, more than 90%, are betting for prevailing 9 flow congestions. I pay the premium beforehand 10 and collect the congestions whenever occurred, so 11 generally speaking the risk is very limited. 12 "These types of trades are for 13 volatility. As long as there are congestions, 14 very likely they're going to make money". 15 What did you understand that statement 16 to mean? 17 A. I mean, I'm -- I'm looking at my 18 response that I -- it looks like I forwarded the 19 email above it to my former colleague and it says, 20 "I guess it is good that it doesn't seem that he's 21 writing insurance against congestion. Makes me 22 want to give him more money". 23 So I guess I thought it was good. 24 Q. Well, when he says, "These types of 25 trades are for volatility," did you have an 134 1 understanding of what that meant? 2 A. I don't recall. 3 Q. He also says, "As long as there are 4 congestions, very likely they are going to make 5 money. On very rare occasions I do put in very 6 small positions for counterflow congestions. 7 These types of trades are against volatility". 8 So did you have any understanding of 9 what it means to be for volatility or against 10 volatility? 11 A. At the time it -- I can just read my 12 response above. It looks like I'm trying to make 13 an analogy to insurance where he's buying 14 insurance and not selling insurance. 15 Q. You don't have any memory of your 16 understanding apart from one you're reading in 17 your response. 18 Is that correct? 19 A. I -- I don't have -- yes, I -- this 20 email was over 13 years ago. I don't have -- if 21 your question is do I have any memory of what I 22 was thinking when I received an email -- this 23 email that was over 13 years ago, the answer is 24 no, as I sit here today I don't have that. 25 Q. Okay. Turning back to Exhibit 9 now. 135 1 Let me know when you're -- you're there. This is 2 page 28 of the PDF. 3 A. I'm there. 4 Q. Okay. We talked about this earlier. 5 This is an email from you to Chen dated June 9th, 6 2009. 7 You said, "Alan, we'd love to invest 8 more and I even sent out an email a week ago or so 9 asking if people were okay ramping up to four to 10 one. 11 "I haven't heard back from everyone 12 yet, but I know that it's a tough sell as when 13 people ask me to quantify the risks, I say I don't 14 really know. And I know that we can definitely 15 never really ramp up, e.g. increase exposure to 16 30X, without knowing the strategy intimately". 17 My question is, when you said "I know 18 that 'we' could definitely never really ramp up," 19 who is the "we" that you're referring to? 20 A. I'm not sure but -- it's either -- I 21 suspect it's the -- the fund that he was trading 22 for. At this time it was -- I think it was 23 Huntrise Energy Fund that he was trading, so maybe 24 I was referring to Huntrise Energy Fund there. 25 But I don't recall. 136 1 Q. Did you mean Huntrise Energy Fund or 2 the individual investors in Huntrise Energy Fund 3 when you said "we"? 4 A. I -- I don't recall. I can speculate 5 that it was Huntrise Energy Fund, but I -- I don't 6 recall. 7 Q. You're talking about possibly ramping 8 up to four to one from I think 2.5 to one. 9 Do you see that? 10 A. Yes. Well I -- I see ramping up -- I 11 see ramping up four to one. I don't see 2.5 to 12 one. But I -- I think we looked at some previous 13 exhibits that suggested that maybe it had started 14 out at 2.5 to one. 15 Q. I'll represent to you it's our 16 understanding that as of this point the multiplier 17 was 2.5 to one. 18 But my question is, did you consider 19 four to one, the possibility of ramping up to that 20 level, to be a -- a large multiplier? 21 A. I don't know if it's large -- I -- it's 22 not -- it's hard for me to say at this point in 23 time what it was. It's an increase from I 24 guess -- if it was 2.5 to one, I think that's a 25 60% increase in the -- the exposure. I think we 137 1 were just trying to respond to the market 2 conditions and the opportunities and the expected 3 risk-adjusted returns of the investment. 4 Q. This ramp-up, possible ramp-up that you 5 were discussing in June 2009 would not have had 6 any relationship to MLSA payments, right? 7 I think you said that you didn't learn 8 about MLSA until the fall of this year. 9 A. I think I said I didn't know about them 10 until 2009. I don't recall specifying the fall. 11 But as I sit here today my guess is this was not a 12 result of the MLSA. 13 Q. As best as you can recall, what -- what 14 would have driven this interest in possibly 15 ramping up to four to one? 16 A. I guess we were just excited. I guess 17 got more comfortable with the expected 18 risk-adjustment returns of the investment, and -- 19 and maybe even the relationship with Alan, for 20 that matter, or at least my -- my perception of 21 that relationship. 22 Q. Why would ramping up to four to one 23 have been a tough sell at that point? 24 A. It says that I don't really know the 25 risks of the fund, the investment. 138 1 Q. So ramping up to four to one without 2 knowing the risks would be a hard sell? 3 A. "I know it's a tough sell when people 4 ask me". 5 That's what this language says here, 6 yes. 7 Q. So ramping up to 20X without knowing 8 the risks would have been a really, really hard 9 sell. 10 Is that fair? 11 A. Not necessarily, no. 12 Q. So explain how ramping up to 4X might 13 be a tough sell but ramping up to 20X might not 14 be. 15 A. Are we talking specifically examples or 16 hypothetical examples? 17 Q. Well, I -- I -- it'd be great if you 18 could work off of this email. This is not 19 hypothetical. This is a real -- real email where 20 you, speaking on behalf of TFS, said it would be a 21 tough sale to ramp up to four to one unless you 22 understood the trading strategy. And I thought -- 23 I think you agreed with me. 24 So, first of all do you agree with me? 25 I -- I think that's how you interpreted your 139 1 language? 2 A. Yeah, I think the language speaks for 3 itself in a sense, but I know it's a tough sell as 4 when people ask me to quantify the risks, I say I 5 don't really know. 6 Q. Wouldn't the same logic go for ramping 7 up to something higher than four to one, it would 8 be a tough sell if you don't really know the 9 trading strategy? 10 A. Not necessarily. And -- and we spoke 11 about this earlier. I gave you an example where 12 if Alan's risk profile drastically changed, 13 drastically reduced, we could get the same 14 exposure but increase our -- our multiplier. 15 So earlier in this conversation I -- I 16 think I gave you a -- earlier in this deposition; 17 I'm not sure this is a conversation, earlier in 18 this deposition I gave you a specific example of a 19 situation where risks -- the multiplier could be 20 increased without any understanding -- change of 21 understanding or even really change in exposure. 22 Q. When you wrote, "It's a tough sell as 23 when people ask me to quantify the risks, I say I 24 don't really know," were you asking for more 25 information to help you quantify the risks at that 140 1 point? 2 A. I don't know what I -- I mean, I -- I 3 don't know what. I can speculate what I was 4 doing. I -- I know -- we just -- I can -- I'll 5 speculate that I was trying to better understand 6 the risks. I could speculate that I was trying to 7 get him to share information about his trading so 8 we could learn more about the place and even have 9 it be something that we pursued ourselves. 10 So there could be ulterior motives for 11 my questions to him. 12 Q. If you go to page two of this document, 13 there is an email in the middle of the page from 14 you to Alan Chen, June 9th, '09, 12:38 p.m. 15 Do you see that? 16 A. I'm sorry, June 9th at 1238 p.m. Yes. 17 Q. You say, "Sounds good. By the way, 18 random: are you trading any other accounts besides 19 your Heep and our Huntrise account?" 20 Why were you interested in that? 21 A. I -- I don't know exactly why I sent 22 a -- this email from over 12 years ago. I can 23 speculate that I was trying to understand his 24 business model and any conflicts of interest that 25 could occur with his relationship with us. 141 1 (12/8/09 email from Kevin Gates to 2 Richard Gates, Bates stamped POW_8242 to 8245, was 3 marked K. Gates Exhibit 11, for identification.) 4 BY MR. TAAFFE: 5 Q. Okay, if you'll move to Exhibit 11, 6 please, PDF page 35. Let me know when you're 7 there. 8 A. I'm there. 9 Q. It's an email from you to Rich Gates, 10 Eric Newman, Chao Chen and Larry Eiben, cc'ing 11 Greg Sekelsky and yourself, December 8th, 2009. 12 Is that right? 13 A. Yes. 14 Q. Are Rich Gates, Eric Newman, Chao Chen, 15 Larry Eiben and Greg Sekelsky investors in TFS 16 Capital at this point? 17 A. I'm not sure I understand the question. 18 Q. Well, you -- you copied them on the 19 email and I'm wondering what their job was such 20 that you decided to copy them on this email. 21 A. I think they were -- 22 Q. What their interest was. 23 A. I think they were -- they could have 24 been or could have had economic exposure to 25 Huntrise Energy Fund. Their day jobs were working 142 1 at TFS Capital. 2 Q. They would have had economic exposure 3 to Huntrise because TFS had exposure to Huntrise, 4 right? 5 A. I don't believe that's the case. 6 Q. Then why would these folks who work at 7 TFS have exposure to Heep Fund or Huntrise? 8 A. They had a side invest -- well, I don't 9 believe they had exposure to Heep directly. They 10 had exposure to Huntrise because they had made an 11 investment in Huntrise Energy Fund -- or actually, 12 that's not even necessarily the case. 13 They had exposure -- I think they had 14 exposure to Huntrise Fund of Funds which owned 15 Huntrise Energy Fund. 16 So I think they were copied in on this 17 because they had economic interest in Huntrise 18 Energy Fund. 19 Q. Okay, in this email in December 2009 20 you say, "We only had Alan trading last month and 21 you lost about 30k from his trading. But we were 22 just reimbursed for a lot of 'transmission losses' 23 that we were previously charged from his trading 24 but shouldn't have been, and I do mean a lot, 25 440,000'ish. 143 1 "So net net we 'made' $410,000 last 2 month". 3 Is this referring to TLC payments? Is 4 that the transmission losses you're referring to 5 here? 6 A. Yeah. I believe that this was Hunt- -- 7 excuse me PJM retroactively paid Huntrise Energy 8 Fund and/or TFS Capital for trading activity that 9 took place in 2008 and 2009, and these monies were 10 paid to the fund. 11 So when I said, "We made it," 12 I think I'm saying we -- on a cash basis we made 13 it. On an accrual basis these monies were made 14 earlier in '09 and earlier in '08. 15 Q. Is this about -- is this time frame, 16 December '09, the first time you heard about these 17 things called transmission loss credits or MLSA 18 payments? 19 A. I don't recall. I believe it was 20 sometime in 2009 and I think you're right that it 21 very well was in the last three months of -- of 22 the year, but it could have been -- it could have 23 been earlier. I -- I don't recall. 24 Q. Do you have any memory of learning 25 about it before this time frame, December '09? 144 1 A. As I sit here now, no. I haven't -- 2 I -- I don't recall specifically. But -- but I 3 think it's -- actually, you know what, Damon, I 4 probably misspoke. 5 Q. Okay. 6 A. This email clearly makes reference to 7 other activities that made me aware. So this is 8 my kind of -- what I would, you know, say 9 educating or informing the other people. But it 10 does -- this email right here on December 8th at 11 9:16 in the morning suggests that I learned about 12 it previously. I don't know when that was. 13 Q. I think you said you were previously 14 charged for this trading, but you also say "we 15 were just reimbursed for a lot of the losses that 16 we were previously charged". 17 So I agree with you, you may have known 18 about the charges before December '09, but were 19 you aware of the credits that sent some of the 20 charges back to you before this time period? 21 A. I don't recall, but it was -- but I -- 22 but the fact that we were just reimbursed, it 23 doesn't mean like instantaneously when this email 24 was sent. I'm not even sure if it was that 25 morning. It could have been the day before. It 145 1 could have been a week or two before. I don't 2 recall. But -- 3 Q. It probably -- it probably wasn't 4 summer '09, though. It was probably sometime 5 around December, right? 6 A. I think that's -- I think that's 7 reasonable. 8 MR. TAAFFE: Let's take a lunch break 9 if that works on your end. Can we go off the 10 record. 11 THE LEGAL VIDEO SPECIALIST: Going off 12 the record 12:45 p.m. This ends media file number 13 three in the deposition of Kevin Gates. 14 (Whereupon at 12:45 p.m. a luncheon 15 recess was taken.) 16 17 18 19 20 21 22 23 24 25 146 1 A F T E R N O O N S E S S I O N 2 (Whereupon at 1:31 p.m. the virtual 3 videotaped deposition of Kevin Gates resumed.) 4 THE LEGAL VIDEO SPECIALIST: We are 5 back on the record 1:31 p.m. This begins media 6 file number four in the deposition of Kevin Gates. 7 You may proceed Mr. Taaffe. 8 BY MR. TAAFFE: 9 Q. Mr. Gates, prior to lunch we were 10 talking about Exhibit 11. That's page 35 in the 11 PDF. If you don't have that open, would go ahead 12 and reopen that, please. 13 A. I have it open. 14 Q. Okay. We've been talking about 15 sometime in -- in probably the latter part of 2009 16 you first learned about MLSA payments or 17 transmission loss credits, whichever terminology 18 you prefer. 19 Did you understand at that point that 20 MLSA would be a -- a one-time payment or something 21 that you could expect to receive going forward for 22 UTC trades? 23 A. I think it was the -- the latter. I 24 think we received them retroactively and also 25 expected to receive them prospectively as well. 147 1 (3/5/10 email from Alan Chen to Kevin 2 Gates, Bates stamped POW_2123 to 2128, was marked 3 K. Gates Exhibit 12, for identification.) 4 BY MR. TAAFFE: 5 Q. Please move to Exhibit 12, which is 6 page 39 I think of the PDF. Let me know when you 7 get there. 8 A. I'm there. 9 Q. This is an email chain between you and 10 Kevin Gates it looks like in March of 2010. If 11 you go to page four of this email chain, there is 12 a February 19th email. So actually I guess the 13 email chain goes back to February. Do you see 14 that? It's on page 42 of the PDF, P in the middle 15 of the page? 16 A. I do. 17 To be clear, I think you may have 18 misspoken earlier. You said an email exchange 19 between me and Kevin Gates. 20 Q. I'm sorry. 21 A. The email is -- it appears to be an 22 email thread between me and Alan Chen. 23 Q. That's a valuable correction, one I 24 appreciate. I also misspoke because the email 25 chain I said was from February, but it's from 148 1 February and March. 2 But hopefully we can agree that on page 3 42 of the PDF, which is Bates POW00012126, there's 4 an email from you to Alan Chen dated February 5 19th, 2010 at 11:32 a.m. 6 Do you see that one? 7 A. I do. 8 Q. You say, toward the end of the first 9 paragraph, first line, "I think that everyone 10 wants to try to get more exposure to power 11 trading, so we may want to ramp up exposure even 12 further at some point in the future". 13 Do you see that? 14 A. I do. 15 Q. Do you recall what Powhatan's 16 multiplier is at this point? 17 A. Again I think -- I -- I think you 18 misspoke in your question. Powhatan as I 19 understand it wasn't trading in the market and 20 didn't have a multiplier at this point. But it 21 was Huntrise Energy Fund. 22 Q. Yes. Thank you for that correction. 23 Do you recall what the multiplier 24 between Huntrise and HEEP Fund was at this point? 25 And I'll tell you I think it's four times but tell 149 1 me if you think you have a different recollection? 2 A. Four times -- I don't have a clear 3 recollection, but four times -- 4X seems 4 reasonable. 5 Q. Okay. So assuming that it is 4X for 6 the time being, just trying to understand how a 7 couple of emails make sense in light of each 8 other. 9 We have an email on February 19th 10 saying, "I think everyone wants to try to get more 11 exposure to power trading so we may want to ramp 12 up exposure even further at some point in the 13 future". 14 So that seems to be talking about 15 moving higher than 4X. Would you agree with that? 16 A. Either that or to the extent we kept it 17 at 4X and I got a sense that Alan -- Alan was 18 comfortable with taking more risk in his portfolio 19 as well. So it could have been a situation where 20 we couldn't get more exposure and we could 21 convince Alan to get more exposure that we could 22 keep it at 4X. 23 Q. Okay. Maybe that answers the next 24 question too. If you go to the top page of the 25 email chain which is PDF page 39 -- let me know 150 1 when you get there. 2 A. I'm there. 3 Q. This is Bates POW00012123. There is an 4 email at the bottom of that page at 8:33 p.m. from 5 you to Alan Chen. 6 Do you see that? 7 A. From me to Alan, yes. 8 Q. Yeah. If you roll over to the next 9 page where the email continues, there are two 10 short paragraphs and then a sentence beginning 11 "finally". That paragraph says, "Finally I'm 12 tempted to ask you to bring our ratio down to 2.5X 13 of yours as it seems our exposure has ramped up 14 significantly recently". 15 So my question is can you -- can you 16 explain on the one hand you're telling Alan that 17 you want to ramp up exposure and on the other hand 18 a couple of weeks later you're saying you might 19 want to bring your ratio down? 20 A. So I didn't review this entire thread 21 in its entirety, so if I look -- but if I look at 22 it in isolation, this email, it seems to me 23 that -- I'm sorry, this is March of '05 and the 24 other one was February, so -- or two weeks, a 25 little over two weeks later I actually say, hey, 151 1 we want to reduce it, yeah, it seems maybe in the 2 subsequent -- in the subsequent weeks I looked at 3 his exposure, maybe simply the megawatts that he 4 was trading, and realized that he had increased 5 his exposure -- his exposure and our exposure and 6 realized that he, you know, got concern that we 7 were taking too much risk. 8 Q. If you go to Exhibit 13 please. So 9 this is page 45. 10 A. Just to finish that thought, I'm 11 looking further up in this thread that seems to be 12 the case. I'm looking at the email that he 13 responded. 14 (3/19/10 email from Kevin Gates to 15 Richard Gates, Bates stamped POW_8000 to 8007, was 16 marked K. Gates Exhibit 13, for identification.) 17 BY MR. TAAFFE: 18 Q. Okay. If you would turn to Exhibit 13, 19 that's PDF at page 45. Let me know when you get 20 there. 21 A. Yep. 22 Q. This is an email -- email sent March 23 19th of 2010 and it attaches a presentation called 24 "Rampin' up with Alan Chen" that we'll see on the 25 next page. 152 1 Do you see that presentation? Maybe 2 it's a Power Point? 3 A. Yeah. It continues -- it starts at the 4 next page and then continues. It's a multipage 5 presentation. 6 Q. Yeah. 7 A. Yeah. 8 Q. If you would scroll down to page three 9 of the presentation, which is PDF Page 48, and let 10 me know when you get there. 11 A. I'm there. Hold on a second. I think 12 I'm there, yes. 13 Q. Okay. You say, "Alan's exposure has 14 significantly ramped up". 15 Can you explain what you mean by 16 "Alan's exposure" ramping up? 17 A. So I -- this -- the graphic didn't come 18 out -- one second. I want to move the screen. 19 The graphic doesn't appear to be sharp. 20 I don't even see those lines. But to me it 21 appears that he's just increased -- he's altered 22 Huntrise's -- I'm sorry, Huntrise Fund and HEEP 23 Fund have had increases in the amount of trading 24 volume in them is -- is what it looks like. It 25 looks like the lines bounce around a little bit 153 1 and then go significantly higher. I can't see the 2 X axis. Maybe I can. Maybe it looks like it's 3 February or March of 2010. I think it's labeled 4 every month. The megawatt hours increased 5 significantly. 6 Q. If you scroll up one page in the 7 presentation toward where it says "Executive 8 Summary," let me know when you're there. 9 A. Yep. 10 Q. The last bullet point, reading, "The 11 strategy has more capacity and we should scale 12 up". And this is a presentation to your investors 13 I think. 14 So my question is, this is dated March 15 4th, 2010 you'll see in the lower right, and 16 you're saying the strategy has more capacity and 17 we should scale up, but this is written within a 18 day saying frankly, "Finally, I'm tempted to ask 19 you to bring our ratio down to 2.5X of yours," so, 20 why would you be asking Alan about possibly 21 reducing his ratio within a day of when you're 22 saying to your investors that the strategy has 23 more capacity and we should scale up? 24 A. I'm sorry, remind -- remind me of the 25 dates. This -- I'm not sure the dates on this. 154 1 The email -- this email was sent in March 19th? 2 Q. Yeah, the executive summary, though, 3 has a date of March 4th, 2010, which is roughly 4 the same time you're telling Alan that you might 5 want to go down from 4X to 2.5X. 6 So I'm just trying to understand why 7 you would be interested in talking to your 8 partners about scaling up at the same time roughly 9 talking with Alan about reducing your multiplier. 10 A. So I -- I haven't reviewed this 11 presentation in the entirety. I see that the date 12 on the footer on slide two has March 4th, but I 13 note that the cover slide is dated March 19th, 14 page 46 of 134, and the email looks like it was 15 dated March 19th. So there's some conflict here. 16 I suspect that this presentation -- my 17 intuition is that this presentation was 18 distributed on March 19th, if I had to guess. 19 Q. Is there some -- okay. Is there 20 something that would happen between March 5th and 21 March 19th that would have caused you to change 22 your views on the ideal multiplier? 23 A. I think Alan's -- well, I suspect 24 the -- Alan told us that he wanted to -- or the 25 response to the previous email that we had talked 155 1 about in that -- the previous exhibit, you just 2 pointed me to emails within that email thread, but 3 there was more emails in that thread where it 4 seems that Alan actually allayed my concerns and 5 said, no, no, no, we're not -- the risk isn't -- I 6 was misinterpreting risk perhaps. I was 7 describing risk strictly as a function of 8 megawatts or megawatt hours and he was saying no, 9 that's not the appropriate way to think about it. 10 Yes our megawatts exposure has increased but our 11 risk has actually decreased. 12 Q. Okay. 13 A. I think if you go back in that thread. 14 Q. If you would go back to that previous 15 exhibit, it's PDF page 40, 4-0, and that is 16 Exhibit 12 for the record. 17 Let me know when you get there. 18 A. I'm there. 19 Q. Okay, I previously asked you about the 20 sentence beginning, "Finally, I'm tempted to ask 21 you to (network interference) -- above that one 22 there's a different subject though. It says, 23 "Also can you remind me what the capacity is for 24 your UTC trading. How many megawatts could we 25 trade on a given day without compromising your 156 1 performance". 2 What are you asking him there? 3 A. So -- so -- I don't know. I can 4 speculate. And again I haven't even read this 5 entire thread. I'm just looking at excerpts from 6 emails within the thread. But my sense is I -- I 7 kind of spent a moment or two looking at his 8 trading and realized that his volume was -- his 9 megawatt hours or his megawatt exposure was 10 ramping up significantly, even though perhaps the 11 multiplier hadn't changed, and I'm asking, hey, 12 are you worried that you were having, you know, 13 capacities kind of this fuzzy concept of how 14 much -- how much volume can the market handle 15 without your adversely affecting prices to the 16 point where it hurts you, like. So I was asking 17 him, like, hey, how much are you -- basically I 18 was trying to understand is he trading too much 19 and then separately asking him what are the -- you 20 know, why are you trading so much? I -- I don't 21 want -- I'm not sure I want that much exposure. 22 Q. What happened that caused capacity to 23 be a concern of yours. Was it a conversation you 24 had with Alan or your knowledge about the markets 25 generally, something else? 157 1 A. I can just speculate based upon that 2 exhibit that you showed me from the -- or the 3 slide from the previous exhibit. It looked like 4 his trading volume had spiked up significantly. 5 Q. But what would make you to think -- 6 what would make you think that there could be a 7 concern with performance compromise related to 8 volume increasing? 9 A. I -- I always think about that. 10 There's always -- any time you allocate to an 11 investment, the more money that you allocate to an 12 investment, the lower the expected returns. 13 For instance, that's why some people 14 who say, you know, investing in Warren Buffet 30 15 years ago would have been great, but now he's 16 managing too much money, that he can't be a symbol 17 (indistinguishable) as he otherwise was, because 18 he's losing prices. He finds a good company and 19 he's starts buying, he jacks the price up too much 20 and he's -- he's too big for his own good. 21 So I was wondering that about Alan. 22 I -- I -- perhaps I looked at his trading volume 23 and I wondered why he -- noticed that the kind of 24 curves started going vertical and more vertical 25 and I asked him to explain -- perhaps I was 158 1 concerned about that. 2 Q. Can you say a little bit more about 3 that phenomenon you described where increasing 4 investment causes performance degradation? 5 What's the mechanic there? 6 A. Well, it's what we had talked about -- 7 in part we had touched on this earlier before 8 lunch, that if you were buying -- if you enter an 9 order to buy a stock, for instance, that the 10 market reacts to that and it's a supply and demand 11 thing and the market will perceive more demand and 12 therefore make you want -- warrant a higher cost 13 to buy the position. 14 So if I want to buy, you know, a 15 thousand shares of some penny stock, I could 16 probably get away with it. If I wanted to buy a 17 million shares, I'd probably -- I -- I would have 18 difficulty. So, you start adversely affecting 19 your own best interest by having market impact. 20 Q. If you would scroll up to PDF page 39, 21 I think it's the same exhibit. Let me know when 22 you get there. 23 A. I'm there. 24 Q. The second email is from Alan Chen to 25 you dated March 5th, 2010. The second paragraph 159 1 of his response to you is he says, "From my past 2 experience a few hundred megawatts, like 400 3 megawatts for a pair would likely cause 4 performance degradation, so I generally stick to 5 400 megawatts max". 6 Is this -- is your understanding is 7 this his answer to your question about capacity? 8 A. Yeah, I think he's trying to explain 9 the -- the capacity there. Yes. 10 Q. Do you read this, "400 megawatts for a 11 pair," a pair of what? 12 A. I don't know. It could either be nodes 13 or it could be UTC trades. 14 No, you know what, actually I think in 15 2010 -- it's possible in 2010, I'd have to -- it's 16 been a while, and the market's evolved so much 17 since, but I think in 2010 maybe UTC had to 18 involve in an export or an interface. So it's 19 either -- it's either legs or a -- or nodes. I'm 20 not sure. 21 Q. If -- if you look at the paragraph 22 above the one I read, it says, "The volumes have 23 been increased pretty significantly but the risks 24 associated with the trades overall are actually 25 lower than before. Most of the added volumes came 160 1 from correlated pairs that produce a few cents or 2 tens of cents upside with almost no downside risk. 3 "Without TLC, the transaction costs 4 would absorb them and leave them unprofitable". 5 Is that phrase "correlated pairs" there 6 informative of -- what the pairs are he is talking 7 about in the next paragraph? 8 A. I think -- yeah, I think that would be 9 legs -- my guess is, if I were to speculate, what 10 he was referring to. Again I didn't -- you know, 11 I didn't write this document, Alan did, and he did 12 it over a decade ago. But I suspect that would 13 be -- you know, if I had to guess I would say that 14 that's legs. 15 Q. The paragraph -- the paragraph I just 16 read, I'll read it again so we can focus on it, 17 "The volumes have been increased pretty 18 significantly but the risks associated with the 19 trades overall are actually lower than before. 20 Most of the added volumes came from correlated 21 pairs that produce a few cents or tens of cents 22 upside with almost no downside risk. 23 "Without TLC, the transaction costs 24 would absorb them and leave them unprofitable". 25 What did Chen mean here by the term 161 1 "correlated pairs"? 2 A. I -- I don't know. I -- I can 3 speculate that he may have meant legs of a UTC 4 trade. So perhaps an import and an export. 5 Q. At -- at this point was Alan Chen 6 putting on trades that essentially went from an A 7 node to a B node and from a B node to a C node 8 where the A and the C were correlated with one 9 another? 10 A. I don't -- I don't know. It's -- I can 11 speculate and say that that's probably -- that 12 that's what was happening. He was doing A to -- 13 you know, if I were to speculate, he was doing A 14 to B, B to C, he was doing those trades that he 15 otherwise would not have done but for the -- these 16 rebates. 17 Q. Okay. Did you have an understanding of 18 what he meant when he said that the correlated 19 pairs that produce a few cents or tens of cents of 20 upside with almost no downside risk, what that 21 meant? 22 A. "What that meant". 23 I -- I probably interpreted it to mean 24 that Alan thought that they were -- in -- in 25 context with the prior sentence that said that the 162 1 risk -- in general you want -- in an investment 2 you want less risk as opposed to more risk and 3 that sentence and the prior sentence will suggest 4 lower risk. 5 So that's -- that's a good thing. So 6 the -- I possibly perceived it that Alan was 7 trying to tell me that there was lower risk in 8 the -- in the funds or in the investment. 9 Q. Did you have an understanding of why 10 correlated pair trades might have lower risk than 11 whatever he had been doing previously? 12 A. I don't know that he wasn't doing 13 correlated pair trading beforehand. I don't even 14 know what it means when he says "correlated 15 pairs". There's -- you know, there are different 16 ways to calculate correlation and there are 17 different correlation thresholds. 18 So I -- I don't know exactly what that 19 means, even as I sit here today, and at the time 20 I -- I wouldn't have known what that meant. 21 Q. Well he said, "The volumes have been 22 increased pretty significantly but the risks 23 associated with the trades overall are actually 24 lower than before". 25 Did you understand how that could be 163 1 so? 2 A. In part because of the way -- the way 3 he instructed the portfolio in response to the -- 4 I mean, the change that occurred between March '05 5 and whatever "before" means -- I don't know what 6 "before" means -- but a -- a possible 7 interpretation could be he had constructed the 8 portfolio differently and had considered or had -- 9 had researched with the TLC's and was beginning to 10 do trades that he otherwise would not have done 11 but for the -- the TLCs. 12 Q. With the trading strategy as it existed 13 on March 5th, 2010, did you have an understanding 14 of where the profit came from on those trades? 15 A. I don't recall. 16 "Where the profit came from". I'm not 17 even sure I understand your question. 18 Q. Well, he says that "The added volumes 19 came from correlated pairs that produced a few 20 cents or tens of cents upside with almost no 21 downside risk". 22 My question is, did you have an 23 understanding of why his trades produced very 24 small upside with almost no downside risk at that 25 point in time? 164 1 A. Well, as an initial matter, I don't 2 know if -- if that's even a true statement that 3 that happened. I know it's a true statement that 4 he said that but I'm not even sure if it's a true 5 statement that that's actually what happened. 6 Q. Did you believe him? 7 A. I don't recall. I -- I know from time 8 to time there were things that I believed him and 9 there were time to times over the course of our 10 relationship there were things that I do not 11 believe. 12 Q. Did you follow up on his representation 13 that there was almost no downside risk in this 14 sort of trade? Did you push back and ask for a 15 further explanation, for example? 16 A. I don't recall. 17 Q. Is it possible you did not push back? 18 A. Yeah, it's -- it's certainly -- "is it 19 possible". 20 When you say push back, I'm not sure 21 I -- I -- but I think what you're asking is it 22 possible that I did not follow up to get more 23 clarification on the -- the risk returns. 24 Q. Yes. 25 A. And I think that's true, yeah, that's 165 1 possible. 2 Q. He's saying at the bottom of that 3 email, "I'll be trading during the weekends and 4 available to talk. Thanks, Alan". 5 Do you recall whether you took him up 6 on his invitation to talk in that time frame? 7 A. So he sent that on Friday night. I 8 don't know if he's referring to just the -- 9 perhaps the 6th and 7th of March, or other -- 10 subsequent weekends. I'm -- I'm not sure what 11 that means. I'm not sure if I did -- 12 If the question is did -- did I call 13 him on the 6th or 7th or of March of 2010. I 14 don't recall. I know that I from time to time 15 would have conversations with him and it's 16 possible that I did speak with him at a subsequent 17 weekend. 18 Q. If you would, turn back to Exhibit 13. 19 That's PDF page 45. 20 A. Yes. 21 Q. And in the "Rampin' Up with Alan Chen" 22 presentation, if you would go to I believe page 23 three of that, which is PDF page 48 -- let me know 24 when you get there. 25 A. I'm there. 166 1 Q. Actually, I'm sorry. Go to the next 2 page, page 49 of the PDF, page four of the 3 presentation. 4 A. I'm there. 5 Q. Okay. This as I understand it is a 6 representation of your trading multipliers, the 7 multipliers between Huntrise and HEEP Fund from 8 2008 through March 2010. 9 Would you agree with me? 10 A. Yes. 11 Q. It looks like it started the beginning 12 in May of '08 at the 2.5 multiplier. I think we 13 talked about that previously. 14 There were two periods late 2008 and 15 early 2009 where the multiplier dropped to one for 16 a month or two maybe it looks like. 17 Do you recall why that happened? 18 A. Well, I'm reading the presentation and 19 it says, "When I saw that the world was coming to 20 an end in the fall of 2008, I asked Alan to 21 decrease exposure to one to one". 22 Q. When you say the "world coming to an 23 end," what was going on then that caused you to 24 want to reduce exposure? 25 A. The financial crisis I guess -- I guess 167 1 really affected the equity market and banks and my 2 business, TFS Capital. 3 Q. When the multiplier went from 2.5 down 4 to one, back up to 2.5 in December 2008 and back 5 down to one, and back up to 2.5 it looks like in 6 early 2009, whose decision was it to move the 7 multipliers on those instances? 8 A. It would have been Huntrise Energy 9 Fund's and Alan. Maybe -- I think he -- I think 10 he pointed me to the advisory agreement earlier 11 and it said that we both needed to -- both 12 entities needed to consent to changing the 13 multiplier. So my guess would be that both -- 14 both parties. 15 Q. I'm sure Alan would have consented, but 16 was there a particular person at Huntrise that 17 determined the multiplier Huntrise wanted to have? 18 A. I'm not sure. I mean, I -- I read this 19 email or this presentation and it says I asked 20 Alan, as if I'm informing people, but then you 21 pointed me to an email earlier that said I was 22 trying to get buy-off from other people to 23 increase this from two-five to four. So that 24 suggested that I unilaterally didn't have that 25 authority. 168 1 So I -- I'm not -- I'm not exactly 2 sure. 3 Q. Just thinking back on it now, was it a 4 collective decision you made with your fellow 5 investors or was it, you know, a unilateral 6 decision that you made, or something else? 7 A. I -- I don't recall. In general we 8 didn't -- it wasn't something that I -- I know it 9 wasn't something that we spent a lot of time 10 thinking about, so -- and I'm not sure if we had 11 set protocols or procedures. 12 Q. At the end of 2009, in the middle of 13 the graph, there's a spike from 2.5 up to the 4X 14 multiplier and then down a month or two later. 15 And in a box it says, "At the end of the annual 16 settlement with Alan I increased our exposure 17 because the risk floor changes because of Alan's 18 fee schedule". 19 Can you explain what that means a 20 little bit more clearly? 21 A. So I think we pay performance -- I 22 think Huntrise Energy Fund paid Alan a percentage 23 of the profits that it -- that HEEP Fund 24 generated. 25 Let me be more precise. Huntrise 169 1 Energy Fund paid HEEP Fund a percentage of the 2 profits that HEEP Fund generated for Huntrise -- 3 for Huntrise Energy Fund, and I think that there 4 was an annual settlement period where Huntrise 5 would pay Heep the -- the money at the end of that 6 fiscal period, this fiscal year. This appears to 7 be suggesting it was at the end of February maybe 8 or sometime in Q1 one of -- of the year. 9 So because there were imbedded gains in 10 the fund, I think the risk return for Huntrise 11 Energy Fund might have been more attractive 12 because there were -- there were imbedded gains 13 that we hadn't paid yet on. 14 So it's one of those things that we get 15 more -- it makes it more attractive to the fund, 16 was kind of in some way speculate with Alan's 17 money pointers, what would soon become Alan's 18 money. 19 Q. The -- the first spike up to four 20 happened in the early months of 2009 and I think 21 we've agreed that you didn't know about MLSA 22 credits at that point, right? 23 A. Yeah, that's -- that would be my best 24 guess was we did not know about them. 25 Q. And there's basically a symmetric 170 1 increase a year later in February 2010 up to four. 2 And the explanation in the box is the same for 3 both of them. Neither one of them mentions MLSA. 4 So the question is, did the -- the 2010 5 wrap-up on the far right have anything to do with 6 MLSA payments or was it only due to the mechanic 7 around the fee schedule? 8 A. I -- I don't recall. I can -- it -- it 9 appears very clearly that it was mechanics around 10 a fee schedule but it may have also included 11 Alan's -- it may have also included MLSA. I -- I 12 don't -- I don't recall. 13 Q. If you'd go to page two of the 14 presentation, which is PDF page 47, please. 15 A. I'm there. 16 Q. The last bullet point says, "The 17 strategy has more capacity and we should scale up. 18 Since we want to do this in a new entity besides 19 HEF," and then it goes on. 20 Why did you want to scale up in a new 21 entity besides Huntrise? 22 A. I'm not sure. I -- again this is over 23 a decade ago, but if I were to speculate, I think 24 Huntrise Energy Fund was owned by another fund, 25 Huntrise Fund to Funds, and I think we perceived 171 1 scaling up associated with increasing our risk and 2 I think we just determined that scaling up 3 wouldn't be suitable for Huntrise Fund to Funds 4 and it would be better suited for a new entity. 5 Q. Why would scaling up risk not have been 6 suitable for Fund to Funds? 7 A. If -- if I were to speculate, because 8 Fund to Funds was described as a lower-risk 9 investment, and if I interpret this, this 10 particular section here, it seems to suggest that 11 scaling it up to the point where it wouldn't be 12 suitable, taking a lot more risk wouldn't be 13 something that would have been suitable for 14 Huntrise Fund to Funds. It's not how the 15 investors in Fund to Funds -- you know, why they 16 allocated capital to the fund or how the fund 17 presented itself, and it seems that an increase in 18 the risk would not be perhaps a suitable 19 investment for that entity. 20 Q. If you'll go to the next page, please, 21 which is PDF page 48, page three of the 22 presentation. Let me know when you get there. 23 A. Yeah, I'm there. 24 Q. And the text says, "Recently Alan's 25 exposure has significantly ramped up . Alan 172 1 maintains that his account, HEEP Fund, isn't 2 taking much more risk. He's participating more 3 heavily in the TLC trade which he describes as 4 almost a risk-free way to make money". 5 Did you write the words on this page? 6 A. I don't recall specifically writing 7 these words. I don't recall specifically making 8 this presentation. I do believe that I wrote a 9 presentation and this very well could be it. I -- 10 I believe that I did, but I'm not sure -- certain. 11 Q. If you go up two pages in the 12 presentation that's called "Rampin' Up With Alan 13 Chen" and Kevin Gates is the listed author at 14 least. 15 So is there a reason to believe you did 16 not write the words on page three of that 17 presentation? 18 A. The -- the only thing that -- it's been 19 so long ago that I don't recall. But, no, I think 20 the issues that you pointed to are accurate. 21 Moreover I've highlighted it appears to be an 22 attachment to an email that I sent. 23 Q. Yeah. Well, let's just assume for now 24 that you wrote it. 25 You say, "He's participating more 173 1 heavily in the TLC trade which he describes as 2 almost a risk-free way to make money". 3 Did he say that in so many words? 4 A. I -- I don't know. To the extent I 5 wrote that, I suspect he may have. 6 If I go back to the previous exhibit, 7 where he said you make money with no downside 8 risk, that's consistent with this. Or it's 9 certainly not inconsistent with it. And that -- 10 moreover that highlights the fact that I believe 11 this March 4th date is incorrect. 12 Q. Did the phrase "almost a risk-free way 13 to make money," in -- in writing those words you 14 would have tried to be accurate to the investors 15 who are going to be reading this presentation, 16 right? 17 A. I'm sorry, what was your -- if -- the 18 question was would I try to be accurate in writing 19 this presentation. That would be -- yes, I would 20 try to be accurate. 21 Q. So if you wrote what Alan described as 22 "almost a risk-free way to make money," it's fair 23 to say that you were accurately conveying Alan's 24 description of -- of the trades at that point, 25 right? 174 1 A. Well, I think it's fair to say that I 2 was attempting to accurately portray him. That's 3 true. 4 Q. When you say "he," that's Alan, "he's 5 participating more heavily in the TLC trade," what 6 did you mean by "the TLC trade"? 7 A. I don't know but if I were to speculate 8 I think we could go back to that previous exhibit, 9 the emails that he sent me, where he talked about 10 limiting downside risk -- you know, almost no 11 downside risk and he's doing trades that it seems 12 like he would not have done otherwise but for the 13 transmission loss credits. 14 Q. Was the term "TLC trade" your term or 15 was it also Alan's term? 16 A. I don't know. 17 (3/23/10 email from Kevin Gates to Alan 18 Chen and Chao Chen, Bates stamped POW_6931 to 19 6936, was marked K. Gates Exhibit 36, for 20 identification.) 21 BY MR. TAAFFE: 22 Q. If you would go to Exhibit 36, please. 23 That is page 129 of the PDF. 24 A. I'm there. 25 Q. Is an email from you to Alan Chen on 175 1 March 23rd, 2010. You said, "We'd like to meet at 2 least one more time to discuss the TLC trade". 3 Does that refresh your recollection 4 about what you meant by "the TLC trade"? 5 A. No. The only -- the only -- I can 6 speculate that -- you showed me documents earlier 7 that talked about correlated pairs and seemed to 8 suggest Huntrise Energy Fund is participating in 9 trades that it otherwise would not have done but 10 for these rebates. 11 So I would speculate that that's what 12 the term -- I was using the term TLC trade to 13 mean, trades that would not have occurred but for 14 these rebates. 15 Q. Did you understand the TLC trades to be 16 spread trades. 17 A. I'm sorry, in 2010 did I understand the 18 TLC trades to be spread trades? Is that the -- 19 the question? 20 Q. Yes, sir. 21 A. I don't recall. 22 Q. Did you have an understanding of why 23 Alan Chen might have described the TLC trades as 24 "almost risk free"? 25 A. There could be a -- a couple of 176 1 reasons. One he maybe wanted us to invest more 2 and -- and two maybe he perceived there to be 3 lower risk in the fund -- in the trades. 4 Those are two reasons that I can think 5 of now of why he may have said that. 6 Q. Were there -- the TLC trades that he's 7 describing here, those were UTC trades, right? 8 A. Yes. 9 Q. And for UTC import trades it was pretty 10 certain that MLSA would be paid for each one, 11 right? The certainty would be how much would be 12 paid. 13 Is that fair? 14 A. I don't know. 15 Q. What don't you know? 16 A. I don't know if that's correct. 17 Q. Did you have an understanding that for 18 UTC import trades MLSA would be paid out at that 19 point? 20 A. I don't -- I don't recall. 21 Q. Did you have an understanding about 22 whether there was spread risk on the TLC trades in 23 spring 2010? 24 A. I'm sorry, could you repeat -- whether 25 there was spread risk in the TLC trades at this 177 1 point in time? 2 Q. Yes. 3 A. How do you -- how do you define the 4 term "spread risk"? 5 Q. Well, I -- I think in certain 6 statements you've made in recent years you've 7 described certain trades at issue in this 8 investigation as spread trades. So I'm happy to 9 work off of what your understanding of that term 10 is, if you have one. 11 Do you understand what a spread trade 12 means and is that a term you use? 13 A. It's a term that I -- yes, it's a term 14 that I use. 15 Q. What does the term mean when you use 16 it? 17 A. I -- I think my brother summarized it 18 the best in the other -- his deposition last week. 19 I never -- I don't recall hearing it described 20 that way, but you can simplify it and simply say 21 there's a risk in the trades. 22 It's kind of a spread trade is the 23 opposite of a wash trade. Wash trades presumably 24 have -- you know, have no risk or de minimis -- no 25 risk and spread trades have risks. So you have 178 1 two offsetting positions that maybe are 2 correlated, highly correlated, et cetera, or 3 another way of saying it is similar or very 4 similar, but they're used to isolate the 5 particular bet or a particular bet that people 6 would want. Like one position hedges out a 7 portion of the other position. 8 So to answer -- if that's the question, 9 yeah, I perceived -- at the time I perceived these 10 trades to have risk, for sure. 11 Q. You described Alan's characterization 12 of the trades as "almost risk free". What did you 13 believe the risk to be if the trades were not 14 almost risk free? 15 A. I didn't know. I don't believe I knew. 16 In general when people describe things 17 as risk free, that sets off warning flags to me 18 when people do that. I mean, I think the SEC has 19 even given out guidance of how to protect against 20 fraud in saying it's -- stay away from investments 21 or investment advisors who promote things as "risk 22 free". 23 So it's possible that that's -- Alan's 24 comments had the opposite effect or in part had 25 the opposite effect on me. He was trying to 179 1 convince me that there was lower risk in the funds 2 but he went to the point where it actually had the 3 opposite. 4 Q. But you described in your presentation 5 Alan's characterization of the trades as "almost 6 risk free," right? 7 A. That's true. 8 Q. And you didn't say anything in the 9 presentation about disagreeing with that 10 characterization, did you? 11 A. We can go back and look at that exhibit 12 if you'd like, but one thing from my recollection 13 I do recall seeing that we thought it was an 14 appropriate for Huntrise Fund to Funds. Huntrise 15 Fund to Funds was a lower risk investment fund and 16 we thought that it was better -- we -- I perceived 17 it to be higher risk and that's exactly why I -- I 18 think perhaps exactly why we wanted to set up a 19 new entity that had a higher risk return profile. 20 Q. What did you understand the risks to be 21 at the time? 22 A. At the time that I wrote that 23 presentation? Is that what we're talking about? 24 Q. No. So at the time that you were 25 recounting Alan Chen's description of the trades 180 1 as "almost risk free," what did you understand the 2 risk to be to render them not almost risk free? 3 A. So we'd probably need to go back to 4 some of those other exhibits, but I think the 5 guess is the last -- right now I'm on -- I'm 6 looking at Exhibit 36, the prior two ones. One 7 was an email that I sent out with the presentation 8 and the other was an email exchange I had had with 9 Alan and I think those two documents would be the 10 first places I would go to understand what -- what 11 I was thinking at the time. 12 My belief is -- and again I haven't 13 read that -- even as we sit here today, I didn't 14 read that presentation in its entirety and I 15 didn't read that email thread in its entirety, but 16 I would speculate that that presentation was my in 17 part summarizing part of that email thread where I 18 described risks. 19 Q. Okay, I -- I don't want to deprive you 20 of the opportunity to look at anything you need to 21 answer the questions. I also don't want to spend 22 all day with you reading documents. So let me 23 just ask it this way... 24 As you sit here today, do you recall 25 the source of any risk that you felt might 181 1 accompany the TLC trades? 2 A. I don't recall specifically what I 3 thought the risks were but, I mean, the specific 4 intricacies of the risk, but I do recall that 5 there was volatility in the return stream of the 6 funds trading activity, and I -- that naturally 7 would be a risk that would be concerned about. 8 Q. Is the volatility related to 9 differences between the sources and syncs of TLC 10 trades or was it due to fluctuations in MLSA and 11 whether or not it exceeds the transaction costs? 12 A. I suspect it was both. 13 Q. You don't recall as you sit here today? 14 A. What drives volatility. 15 I mean, they -- they both played a -- 16 they both would have effected volatility of the 17 fund, of the return stream for Huntrise Energy 18 Fund; certainly the MSLA payments relative to the 19 fixed cost of the transaction and any congestion 20 spreads. 21 Q. Are you still on Exhibit 13, and if not 22 could you go there. 23 A. No. I was back at 36. 24 Q. Yeah, page -- page 38 of the PDF, 25 please, if you'd go there. That's Exhibit 13. 182 1 A. I'm there. 2 Q. What is the "Y axis"? I see the 3 numbers there. I just don't know what those 4 numbers represent. 5 A. I think megawatts or megawatt hours and 6 I don't know if it's daily. I suspect it's 7 daily -- you know, it looks like it's labeled, but 8 it's all fuzzy. 9 I believe those are daily megawatt or 10 megawatt hours. 11 Q. Okay. Whichever it is, it looks like 12 starting on about February 2010, Huntrise's 13 exposure let's call it on the Y axis increased for 14 about 10,000 to more than 70,000 in the space of a 15 month. 16 Am I reading that correctly? 17 A. I -- it's -- it's something like -- I 18 have a very fuzzy copy, but within a month or two. 19 I believe that's the case, yes. 20 Q. And that is the time period that the 21 TLC trade began, right, February 2010? 22 A. I don't know what TLC trade means as I 23 sit here today, but I think that that's when 24 Alan's -- began increasing his exposure in 25 response to the pricing as provided for by the 183 1 TLCs. 2 Q. If you turn to page five of the 3 presentation, PDF page 50 -- let me know when you 4 get there. 5 A. I'm there. 6 Q. There is a -- an upward spike in the 7 far right of that graph that is labeled, "The last 8 couple of months Alan has found a new 'risk free' 9 trade. He takes advantage of the fact that we now 10 collect transmission losses". 11 Do you see that? 12 A. I do. 13 Q. And that's 2010, right? 14 A. Yes. 15 Q. So does that confirm that your 16 explanation for the volume spike in 2010 relates 17 to the existence of these transmission loss 18 credits? 19 A. Yeah. I think that's -- I think that's 20 the case. I think that's consistent -- I believe 21 this is consistent with -- with what I was saying 22 previously, that he began doing trades sometime in 23 Q -- began increasing his trading activity in Q1 24 of 2010 in response to the TLCs. He was beginning 25 to react to that price signal. 184 1 Q. If you thought these trades weren't 2 risk free, why did you use the words "risk free" 3 twice in this presentation to your investors? 4 A. So when -- I thought these trades were 5 not risk free. 6 In this particular slide it looks like 7 I'm quoting him, basically implying that Alan's -- 8 I'm trying to convey the fact that Alan described 9 them as risk free. I think that's -- and on this 10 slide -- this is slide four of the presentation, 11 Bates number ending in 8005, and the previous 12 slide, slide three of the presentation, 8003, I'm 13 describing it as -- saying that he describes it as 14 risk free. But nowhere in here did I say that I 15 agreed with him. Moreover there are reasons why I 16 may not have -- that I would not have agreed with 17 him. In general -- 18 Q. Well, in fact you said minutes ago that 19 words like "risk free" are I think you said red 20 flags in the investment context. Is that a 21 fair -- 22 A. It's fair that I -- I think of those -- 23 that term can be a red flag, yes. 24 Q. What should we make of the fact that 25 Alan was using the words "risk free" (network 185 1 interference) -- for partners in reporting what 2 Alan said -- 3 THE COURT REPORTER: Apologize, Mr. 4 Taaffe, half the question was blanked out. So 5 sorry. 6 MR. TAAFFE: You're killing my momentum 7 here, Kim. 8 THE COURT REPORTER: I'm so sorry. 9 MR. TAAFFE: It's okay. I'll try 10 again. 11 BY MR. TAAFFE: 12 Q. If -- if words like "risk free" are a 13 warning bell, then what should we make of the fact 14 that Alan was using those words to you and you 15 were reporting those words to your investors, and 16 at the same time that this warning bell is out 17 there you are, you know, increasing your market 18 exposure by 700% in the course of a month? 19 A. I guess what you make of it. I guess 20 that we were conflicted. Not conflicted in the 21 legal sense, but conflicted in -- in the sense 22 that we didn't have a clear understanding. 23 Q. Did you try to get a clear 24 understanding? 25 A. "Try to get a more clear 186 1 understanding". 2 Yes. 3 Q. Did you consider it important to have 4 an understanding, an accurate understanding of the 5 risks that your portfolio faced as your exposure 6 jumped up in this time period? 7 A. Could you repeat -- I heard the 8 question, but I didn't process it fully. Could 9 you repeat the question. 10 MR. TAAFFE: Could you read it back 11 please, Kim. 12 THE COURT REPORTER: Yes. 13 "Question: If words like risk free are 14 a warning bell, then what should we make of the 15 fact that Alan was using those words to you and 16 you were reporting those words to your investors, 17 and at the same time that this warning bell is out 18 there you are, you know, increasing your market 19 exposure by 700% in the course of a month. 20 "Question: Did you try to get a clear 21 understanding? 22 "Question: Did you consider it 23 important to have an understanding, an accurate 24 understanding of the risks that your portfolio 25 faced as your exposure jumped up in this time 187 1 period?" 2 THE WITNESS: Did we consider the -- I 3 would go back to what I had said earlier. There 4 are -- there are different ways to understand risk 5 and one way that we can control risk is by 6 tethering our exposure to Alan's exposure. 7 So we attempted to learn more about his 8 trading activity. We attempted to understand the 9 risks. 10 Was it important? There were certainly 11 more important things in my life at the time than 12 that. Were we successful in understanding the 13 risks? No. I -- I -- at the time I was not 14 successful in understanding the -- the -- the 15 trading activity that took place. 16 Q. Would you invest your investor's funds 17 in a product whose risks you did not understand? 18 A. Well, I don't think I ever fully 19 understand risk, so, yeah, from the -- I mean, I 20 can talk about the, you know, power markets or 21 equity markets, but I don't think people fully 22 understand -- people never fully understand risks. 23 In August of 2007 when the credit 24 crisis hit, that was unlike anything that I had 25 ever imagined and that was a risk I had never 188 1 contemplated. In February of this year in Texas, 2 I didn't understand or appreciate those risks in 3 advance. 4 So the answer is would I? Yes and also 5 unfortunately I've also done that, as well. 6 Q. Well, if -- if you went to Alan Chen in 7 2010 and you said, "I'm thinking about investing a 8 few million dollars in reliance on your trading 9 strategy, what are the risks," and he said that, 10 "Well, I don't know that anybody can really 11 understand risks," I -- I suspect, tell me if I'm 12 wrong, but I suspect you wouldn't have been 13 satisfied with that answer. 14 So in -- in a trade like this, how much 15 did you try to understand the risks that you were 16 facing? 17 A. The -- and if you look at some of the 18 disclaimers and investments that I've -- I've made 19 investments -- personally I've made investments in 20 funds that had a list of disclaimers that 21 basically, you know, documents written by 22 attorneys that list ten pages of risks, and then 23 the last risks -- the last stated risk is the 24 risks that we haven't even thought about, is 25 another risk that we haven't even contemplated 189 1 that. I think that's even in many publicly traded 2 companies. In their quarterly or annual filings, 3 they describe all the risks and then say also 4 there's other risks that we haven't even thought 5 about. 6 So unfortunately that's inherent in the 7 nature of investing. 8 Q. It's inherent in the nature of 9 investing that if -- if the philosophy is you 10 really can't hope to understand risk, I don't 11 understand the document that we talked about 12 earlier from the summer of 2009 where you said 13 that "we could not ramp up our exposure without 14 understanding your strategy intimately". 15 A. I think -- I think you're 16 miscategorizing -- miscategorizing that document. 17 I don't believe that that's what that document 18 says. Moreover I think it may say the exact 19 opposite. It does discuss ramping up risks 20 specifically from two point -- perhaps from 2.5 to 21 4 O where I specifically say the -- that I don't 22 understand the risks. 23 Q. If you would go back to Exhibit 9, page 24 28 of the PDF. Let me know when you get there. 25 We talked about this earlier and I just 190 1 want to move back to it and -- 2 THE LEGAL VIDEO SPECIALIST: Frozen 3 again. I'm wondering if we should go off the 4 record. We will do that. 5 Going off the record 2:37 p.m. 6 (Brief pause.) 7 THE LEGAL VIDEO SPECIALIST: We are 8 back on the record 2:41 p.m. 9 BY MR. TAAFFE: 10 Q. Mr. Gates, before we had some technical 11 difficulties I was asking you about some things 12 you wrote in the spring of 2010 about quote, 13 unquote, "risk-free investments," as Alan Chen 14 described them, and I -- I think you were saying 15 that you didn't believe him necessarily and you've 16 learned that nothing is risk free and everything 17 comes with many risks and you're comfortable not 18 understanding all of them. 19 Is that roughly fair? I don't want to 20 mischaracterize what you said? 21 A. Yeah, I think that's roughly fair. To 22 be clear, I thought when we got disconnected last 23 we were looking at Exhibit 9, which was from June 24 of 2009, but maybe -- maybe I'm off. 25 Q. Right. No, you're -- you're completely 191 1 correct. And that's where I'm going next. 2 MR. TAAFFE: Before I do that, though, 3 hey, Kim, can you confirm that you're here. You 4 haven't been on -- 5 THE COURT REPORTER: Yes, yes, I'm 6 here. 7 MR. TAAFFE: Okay, thank you. Sorry 8 BY MR. TAAFFE: 9 Q. So going to Exhibit 9 now, which is 10 page 28 of the PDF, the language we discussed 11 before where you said, "And I know that we could 12 definitely never really ramp up without knowing 13 the strategy intimately," why would you write 14 those words if, as you say, you're comfortable not 15 understanding strategy and not understanding risk 16 and that's something you do commonly? 17 A. Well, I think I was trying to 18 understand Alan's -- I was trying to understand 19 Alan's trading I think is what I was trying to do 20 and I was trying to encourage him and give him the 21 carrot to be more forthcoming with information, so 22 I could at least get a better handle of the risks. 23 I don't think I'd ever fully understand the risks. 24 Q. But you'd agree that the more exposure 25 you have, the more important it would be to 192 1 understand the risks you're supposed to, right? 2 A. I guess all else being equal, but I 3 could imagine -- easily imagine situations where I 4 would get more exposure and be comfortable with 5 less understanding of risks. 6 Q. Going back to Exhibit 13 now, please -- 7 I'm sorry for jumping around -- page five of that 8 presentation. 9 A. Yes. 10 Q. All right. You wrote that "Alan is now 11 actively altering his trading to profit from the 12 TLC". 13 And is that consistent with the box you 14 had in February 2010 where it describes "Alan has 15 found a new risk-free trade that takes advantage 16 of the fact that we now collect transmission 17 losses"? 18 A. To be clear there -- there are quotes 19 around -- sometimes when you read things before 20 you read quotes. So it specifically ... "Alan 21 had found a new 'risk-free' trade". So I just 22 want that on the record. 23 To be clear it's -- it's consistent -- 24 yeah, it's -- well, it's really not inconsistent 25 with it. It mean, it's -- it seems that there -- 193 1 yes, it's not inconsistent with it and perhaps 2 consistent with it. 3 Q. Did you have an understanding of how 4 Alan is now actively altering his trading to 5 profit from the TLC? 6 A. In March of 2010. 7 I know he was -- in that one of the 8 previous exhibits that we looked at he talked 9 about correlated pairs. He talked about the 10 ability to make a few cents or five or ten 11 cents -- I forgot his exact language -- with no 12 downside risks. As I sit here today, those are 13 what I recall that he was doing. 14 Q. If you go to page seven please of the 15 presentation, PDF page 52. Let me know when you 16 get there. 17 A. I'm there. 18 Q. The second bullet point discusses the 19 prospect of increasing the multiplier as high as 20 20X. 21 Do you agree with me on that? 22 A. The second bullet point has 20X in it, 23 yes, or at least a couple times. 24 Q. Yes, so it -- it contemplates the 25 possibility at least of increasing the multiplier 194 1 to -- to 20X. 2 My question is, did you consider the 3 possibility that if you increased your multiplier 4 to 20X your trading might cause transmission 5 capacity to be unavailable to other UTC traders? 6 A. "I consider that". 7 I don't recall. If I would speculate, 8 I would speculate no, but I don't recall knowing 9 much about the -- the process of reserving 10 transmission. I didn't get too much into the 11 weeds on that. 12 The answer is no, I don't recall, but I 13 speculate that wasn't even anywhere on my radar. 14 Q. If you go to page two -- I'm sorry? I 15 thought I heard something, I'm sorry. 16 If you go to page two of the 17 presentation, PDF page 47. Let me know when 18 you're there. 19 A. I'm there. 20 Q. The second paragraph says, about 21 halfway through, "But Alan is fearful that PJM 22 could change his mind and can force UTC traders to 23 pay TLCs. He hasn't heard anything to suggest 24 that they will but I think he feels that way 25 because it is just too easy for him to make money 195 1 now". 2 Is the -- the fear that you report here 3 on Alan's part something you discussed with him? 4 A. I don't recall. I could speculate that 5 it was. 6 Q. You probably wouldn't have summarized 7 Alan's fear if you had not heard him express fear 8 of some sort, right? 9 A. I think that's a fair assumption. 10 Q. Did Alan say to you at any point that 11 "he feels it's just to easy for him to make money 12 now"? 13 A. I don't recall. 14 Q. But you write, "I think he feels that 15 way because it's just too easy for him to make 16 money now". 17 So either it's something that Alan said 18 or it's something that you inferred that he 19 believed. Do you -- do you know as to which of 20 those things it is? 21 A. No. 22 Q. You don't recall what caused you to 23 write those words? 24 A. I'd have to -- as I sit here today, no. 25 Q. To your knowledge, has PJM ever said 196 1 anything to suggest that they view it as a problem 2 if it's too easy for people to make money trading 3 in their markets? 4 A. And when we say PJM, are we -- are you 5 talking about any representative or management at 6 PJM? 7 Q. No. I -- I'm just trying to ask about 8 what you wrote. 9 You wrote, "Alan is fearful that PJM 10 could change its mind and could force UTC traders 11 to pay TLCs. He hasn't heard anything to suggest 12 it will but I think he feels that way because it's 13 just too easy for him to make money now". 14 I think it follows that Alan thinks one 15 reason PJM might change its mind is because it's 16 too easy for him to make money now. 17 Is -- is that what you meant when you 18 wrote this? 19 A. I don't recall. 20 Q. Do you recall what you meant when you 21 wrote this at all? 22 A. I know that there was retroactive 23 charges applied in MISO around this time period. 24 There was something -- I think it was called RSG 25 payments around this -- Damon, did you -- I just 197 1 saw -- I don't know if I went out on you, but I 2 saw a little circle suggesting that you went out 3 of the meeting. 4 Q. Yeah. 5 A. But I'll -- let me start again. 6 I know around this time or maybe 7 shortly prior to this time there were retroactive 8 charges assessed in MISO, I think virtual trading 9 in MISO, something called -- I believe RSG and 10 maybe there was just a general fear in the air 11 that retroactive assessments of fees could also go 12 to PJM. But to answer you specifically, I don't 13 recall -- I'm never aware of PJM thinking it's 14 too -- it's bad if you -- well, I don't recall 15 explicitly PJM ever saying that it's bad if market 16 participants make too much money. To be fair I've 17 heard -- over the years, I've heard a whole host 18 of people say that in these markets is that if 19 you're too successful, you know, particularly -- 20 somebody -- I forget, somebody in California or 21 CAISO or SPP said it's -- if you lose money, you 22 lose money, but if you make money, they'll just 23 take it away from you. 24 So I have heard people say that over 25 the years, that one technique is to not make 198 1 money, or not make too much money. I don't know 2 if that influenced this. 3 Q. Did you have any sense that in this 4 time period the TLC payments didn't make sense on 5 some level? 6 A. I don't know that -- I remember being 7 surprised when we received the retroactive -- when 8 Huntrise Energy Fund received the retroactive 9 payments for TLCs for trades had that occurred, 10 some of them at least a year and a half earlier, 11 and I was more used to markets where trades settle 12 in three days. I knew that PJM was a little bit 13 different and they could settle trades 30 days 14 after the fact, which was surprising. 15 I had -- was not -- at this time I 16 don't believe I was involved in a market that 17 could resettle or attempt to resettle trades years 18 after the fact. 19 So I -- I -- I do think that that's -- 20 I think quicker settlement is generally better for 21 the market and society generally. 22 Q. You said -- did your attorney ever 23 email the transcripts to you? I know you didn't 24 have them this morning. Do you have them now? 25 A. I think he -- 199 1 MR. PERKINS: I did. I did send them. 2 MR. TAAFFE: Okay. 3 MR. PERKINS: -- this morning. 4 BY MR. TAAFFE: 5 Q. If -- if you have it handy, if you have 6 it handy, could you open other Exhibit 2. 7 A. I -- I do not have them handy. I 8 could -- I don't know if it would be helpful, but 9 I do have access to the internet and I believe 10 these same deposition transcripts were uploaded 11 FERC Litigation. I don't know if you'd like me to 12 pull them up from there to get them quickly. 13 Q. Let me just try reading this to you and 14 maybe that'll be enough. 15 In -- for the record, this is page 214 16 of the September 7th, 2011 transcript. There was 17 a question put to you. Here's the question: 18 "Going to the last page of the email, Dr. Chen's 19 statement to you, is this the first time that he 20 raises with you his concern about the possibility 21 of PJM? He says, 'The bad thing is it really 22 concerns me. If PJM ever reverts back to those 23 days without TLC or the TLC calculation was/is 24 incorrect and we have to pay back all or some of 25 the TLC funds, we are going to be in big trouble 200 1 and I have not heard anything about this at all, 2 but just the problem nags me a lot'". 3 Do you remember that email? 4 A. You know what? That rings a bell. 5 That does ring a bell. I think I may have 6 received that email from -- 7 Q. Yeah, here's your response -- here's 8 your response that I want to ask you a question 9 about. You responded, "I suspect that I did, that 10 I think he realized from a policy standpoint the 11 transmission loss credit was a bad policy. If he 12 was the one designing the marketplace and he had 13 the responsibility to the marketplace to create it 14 in his ideal marketplace, I don't think he would 15 have instituted this TLC. I think he would say 16 rebates or transmission loss credits are rebates 17 and they're intended to encourage certain behavior 18 and these rebates are encouraging the wrong 19 behavior". 20 Do you remember that testimony? 21 A. Do I -- do I remember that -- I don't 22 remember -- I don't remember that testimony, no. 23 No. 24 Q. You -- did you have a view about 25 whether in this time period that the TLC payments 201 1 were a good policy or a bad policy? 2 A. Well, generally I think it might have 3 been in that same deposition I made reference to 4 monkeys throwing darts and saying that -- the FERC 5 had -- that PJM had created a market where a 6 throwing darts could have made money, and I also 7 believe -- throwing darts and just picking nodes 8 to trade on. So -- and -- and, to this day, I 9 still believe that. 10 My brother had mentioned the other day 11 that during -- again with the benefit of 12 hindsight -- at the time I didn't perceive it this 13 way -- but with the benefit of hindsight I believe 14 a monkey throwing darts could have made money. I 15 believe that all traders, market participants made 16 money that summer. 17 So I think the -- I would say that 18 that's probably not a -- a healthy or a natural 19 marketplace, where monkeys can make money. 20 (3/5/10 email from Kevin Gates to Alan 21 Chen, Bates stamped POW_6981 to 6982, was marked 22 K. Gates Exhibit 14, for identification.) 23 BY MR. TAAFFE: 24 Q. If you turn to page -- Exhibit 14, 25 please, PDF page 53, and let -- let me know when 202 1 you're there. 2 A. Yes. 3 Q. This I think is the email you were 4 referring to in the deposition testimony I read to 5 you a minute ago, the Friday March 5th, 2010 email 6 from Alan Chen to you on the bottom half of the 7 page. 8 Do you see that? 9 A. Yes. 10 Q. The last paragraph, if you go about 11 three lines down over to the right side, Alan 12 writes, "It is a good thing we are making money. 13 I am pretty sure about it if TLC refund continues 14 as is. The bad thing is it really concerns me. 15 If PJM ever reverts back to those days without TLC 16 or the TLC calculation was/is incorrect and we 17 have to pay all or some of the TLC refunds we're 18 going to be in big trouble". 19 Do you see that? 20 A. I do. 21 Q. And you respond, "Alan, if you're 22 concerned that I'm really, really concerned as I'm 23 flying blind on this issue, to get any insight on 24 the issue, why not contact the law firm, the FERC 25 or PJM to try to get more insight into this 203 1 issue?" 2 Are you aware of whether you or he 3 contacted FERC or PJM or an attorney to get more 4 insight into this issue? 5 A. I don't know. I don't recall. And -- 6 and again this is for Hunt -- we're talking about 7 March of 2010. These are the rebates that 8 Huntrise Energy Fund was collecting in the market 9 and as I understand it were asking if PJM is 10 giving them to them retroactively, they're giving 11 them to us prospectively, should we contact an 12 attorney to figure out if they're going to 13 retroactively change these price signals. And I 14 don't -- I don't recall if we -- if Alan or 15 anybody at Huntrise Energy Fund contacted an 16 attorney, FERC or PJM to get more -- 17 Q. If you're -- if you're really, really 18 concerned, as you put it, why wouldn't you have 19 taken that step or asked Alan to take it? 20 A. Well, I -- I'm not sure I -- I -- I'm 21 not sure I didn't, as initial matter. But it's 22 also -- I could -- it's very possible that after 23 I -- it sounds like I may have spoken with him on 24 the phone and he may have suggested that he wasn't 25 as concerned as his email suggested. 204 1 English is his second language and he 2 doesn't always communicate effectively and it may 3 have simply been that he -- my -- my statement 4 was, if you're really concerned then I'm really, 5 really concerned. But I could have found out 6 during our conversation that he -- that I 7 didn't -- he wasn't really concerned. 8 Q. Do you think in this period PJM was 9 aware of the TLC trading strategy? 10 A. Yes. 11 Q. Why do you think that? 12 A. Because they received and processed the 13 trades. 14 Q. Well that -- that could be a reason 15 they would know that the trades happened but that 16 might not explain their knowledge of the strategy 17 behind why you were making the trades. 18 So, the question is whether you think 19 that PJM at this point was aware of the TLC 20 trading strategy? 21 A. I'm sorry, when you say the TLC trading 22 strategy, you're saying the thesis or the 23 investment -- the underlying investment thesis of 24 the trades? 25 Q. Correct. 205 1 A. I mean, I don't -- no, I don't think -- 2 I mean, I don't think Alan disclosed to them 3 the -- the logic that he was using to put on these 4 trades, if that's your question, how he selected 5 his nodes and his hours and his megawatts, so on 6 and so forth. No, I don't think that. 7 I -- I do know that they received all 8 the trades. Moreover, I suspect that they were 9 aware that trading volume was increasing in the 10 marketplace generally as a result of the price 11 signals that they introduced. 12 Q. I -- I asked you a moment ago about 13 your discussion about why not contact a law firm, 14 the FERC or PJM to try to get more insight into 15 this issue. I just want to make sure I understand 16 your testimony. 17 Is it your testimony that you don't 18 know whether Alan Chen had any such call or are 19 you speculating that it happened? 20 A. It -- it -- I mean, to be fair it could 21 be both. It's not an either or. But, no, I 22 don't -- as I sit here today, I don't recall what 23 if anything he had done subsequent to this. It -- 24 again my speculation I think was maybe he allayed 25 my concerns when we spoke on the phone and said, 206 1 okay, by the way I already spoke to PJM about this 2 or I already talked to them about the MLSA, or he 3 also could say, hey, they really can't do that, 4 this RSG retroactive collection was -- was bogus 5 and you can't really do that or you shouldn't do 6 that and they're -- they're not going to try to do 7 that again. Or you -- moreover there's just kind 8 of you can't retroactively change the rules. So 9 he may have -- he may have said something like 10 that. But I don't recall specifically. Again 11 this is an email from about over and 11 and a half 12 years ago. 13 Q. If you would turn to Exhibit 36. 14 That's PDF page 129 please. 15 A. I am there. 16 Q. You say in the top line, "We'd like to 17 meet at least one more time to discuss the TLC 18 trade and learn more about PJM's views on it". 19 It's an email from you to both Chens 20 actually, Alan and Chao. 21 Is the possibility that PJM could 22 demand repayment of the TLC one of the reasons you 23 wanted to create a new entity to conduct the TLC 24 trades? 25 A. Entity -- I -- I believe the 207 1 presentation -- I mean, I can speculate no. The 2 presentation that we looked at earlier said that 3 it -- the impetus for creating a new entity was to 4 ramp up trading volume. So that to me suggested 5 that that was the reason for it. But the answer 6 is I -- I don't know. Again we're talking 7 something 11 and a half years ago. 8 (3/17/10 email from Kevin Gates to 9 Larry Eiben, Bates stamped POWDC6448 to 6449, was 10 marked K. Gates Exhibit 29, for identification.) 11 BY MR. TAAFFE: 12 Q. Turn to Exhibit 29, please. That's on 13 PDF page 113. 14 A. Yes. 15 Q. This is an email from you to Larry 16 Eiben I think, larry@tfscapital.com, March 17th, 17 2010. 18 You say, "The sooner the better. I was 19 thinking about just closing down Huntrise, HEF, 20 but now that you mention it, maybe we could just 21 use HEF and structure it differently and have us 22 invest directly as opposed to through Huntrise 23 Fund to Funds, or do you think it would be safer 24 if we just started from scratch? 25 "My plans are to really lever up over 208 1 the summer with Alan and it's possible that we'll 2 end up imploding. I want it full insulated from 3 Huntrise Fund to Funds". 4 (Network interference)? 5 Q. Why did you think it was very possible 6 that the new fund would wind up imploding? 7 A. As an initial matter, unfortunately, 8 Damon, I think you actually went out on us during 9 that question but I think -- it doesn't matter. I 10 don't think it's a big deal because I believe you 11 were just reading the email that you had sent -- 12 that -- that you had directed me to. 13 Q. Yes, yes. 14 A. So I think we're okay as it relates to 15 that. 16 But I'm on Exhibit 29, an email that 17 I -- an email exchange that I had had with Larry 18 Eiben on March 17th -- well, began on March 15th, 19 2010 and extended to March 17th. 20 Q. Just -- let me just ask the question, 21 make the record clear. 22 You're discussing what to do with -- 23 with HEF fund, whether to close it down or what to 24 do with it. And you say, "My plans are to really 25 lever up over the summer with Alan. It is very 209 1 possible that we'll end up imploding". 2 Why did you think it was possible that 3 a new fund would end up imploding? 4 A. As an initial matter, I don't think 5 that statement's true, "lever up the fund". When 6 I -- when I think of the term "lever up," I think 7 of borrowing money or not posting enough 8 collateral. I don't believe the fund was levered 9 in that sense. 10 I -- I think what I meant was 11 increasing exposure and it's possible that we'll 12 end up -- the fund would end up imploding, I think 13 that speaks to a conversation that we had earlier 14 today when I said that I was conflicted. I -- you 15 know, I wanted to increase exposure but there were 16 red flags. When Alan describes things as risk 17 free, sometimes they're the exact opposite. 18 So any time you're increasing exposure 19 significantly, and I -- I knew that he had already 20 increased exposure and we were going to increase 21 our ratio on top of that, there is a lot -- there 22 is risk there, even unrealized risk, or -- yeah, 23 unrealized risk or unforeseen risk and I was 24 concerned about the -- the funds returns. 25 Q. Throughout the -- the last couple of 210 1 hours, there's been a -- a thread of mentioned to 2 the effect that when Alan described the trades as 3 almost risk free, that set off warning bells in 4 your head and I -- I just want to understand a 5 little more. 6 Did your perception of risk increase 7 when he described the trades as almost risk free? 8 A. I don't recall. I don't recall if my 9 perception of risk increased. It was coupled with 10 the fact that -- 11 Q. In your view -- if -- if you're trading 12 with someone like Alan and he's making money and 13 he describes a -- a shift in the trading strategy 14 that makes the trading almost risk free, in your 15 mind is that a sign that the risks have increased 16 or decreased? 17 A. It could be -- it could be either. 18 I could imagine a situation where it 19 would be -- you know, where I would have invested 20 with somebody and they would describe it that way 21 and I would redeem my money immediately. There 22 are -- would be hyper concerned about risk. There 23 are also situations where it would address some of 24 the concerns. I don't think I'd ever perceived 25 things as risk free but it's possible that -- that 211 1 I could perceive it as comforting. 2 But, I mean, I look at this email from 3 the 13th. I don't recall. And I've -- I've 4 reviewed, to be fair, over the -- the last 11 -- 5 11 years I've reviewed emails and I do know that 6 this is one of just a handful of emails that I 7 wrote in 2010 that describes the risk of implosion 8 and I don't believe that I saw similar emails in 9 2009 and previously. So I think that I did 10 perceive more risk, investment risk in Powhatan or 11 in -- I guess, excuse me, it's bigger than 12 Powhatan. Up to Alan's trading in 2010 I 13 perceived greater risk in 2010 than I did in 2009, 14 and that was probably as a result of in part 15 influenced by Alan's statement, in part influenced 16 by the increased megawatts that he was trading and 17 in part influenced by an increased ratio. 18 Q. By the time you were writing the -- the 19 words about Alan's view of almost risk free in -- 20 in March 2010, he had been trading on your behalf 21 for almost two years, right? 22 A. I believe -- I don't know exactly when 23 he started but I think that's probably true, yes. 24 Q. So he's not somebody you were 25 unfamiliar with at that point, yes? 212 1 A. We had established a relationship, yes. 2 Q. If you would go to Exhibit 36, please, 3 PDF page 129. 4 A. I'm there. 5 Q. Point number two in the first email -- 6 this is from you to the Chens on March 23rd, 7 2010 -- you said, "We'd prefer going to 20X as we 8 only want to pay the 20% performance fee". 9 At this in time, in the spring of 2010, 10 what drove the decision to go from a 4X multiplier 11 to a 20X multiplier? 12 A. I don't recall specifically but I 13 suspect it was multifaceted but perhaps the 14 largest factor being the introduction of TLCs. 15 Q. What's the highest -- what's the 16 highest multiplier you've ever had with a 17 third-party trader apart from Alan Chen? 18 A. Oh, my God. I mean, I think I've had 19 an infinite multiplier with some people. There's 20 some people that I've invested my own money and 21 they didn't have any of their own capital at risk, 22 so perhaps that's considered an infinite 23 multiplier. 24 Q. Let's -- let's put that type of case 25 aside. Let's talk about ones where the person's 213 1 money's at stake and the -- the trader has skin in 2 the game, like Alan Chen did. 3 What's the highest multiplier you've 4 had in that sort of arrangement, apart from Alan 5 Chen? 6 A. I don't recall. 7 Q. Is it higher or lower than 20X? 8 A. I -- I don't know. 9 Q. Are you aware of any third-party trader 10 you've had with the multiplier arrangement like 11 this that had a multiplier higher than 20X? 12 A. I'm not sure I understand the -- the 13 multiplier arrangement that we discussed. If an 14 investor has a fund -- I mean, we discussed 15 earlier that there are ways to backdoor -- 16 backdoor this. But -- and when you say "me," this 17 is specific to Huntrise Energy Fund or -- or 18 Powhatan, or you're saying me generally in my 19 entire professional or -- or personal investment 20 career? I do know that I've created -- I've given 21 money to traders -- or not given. I've allocated 22 money to traders who were trading commodity 23 futures, as regulated by the CFTC, and then they 24 may have had a really small portion of personal 25 monies at risk where the multiple could have been 214 1 a lot higher. 2 I -- I don't know I guess is a -- 3 Q. Okay, okay. 4 A. -- is the answer. 5 And to be fair, that would be a tricky 6 one to answer. Some of the questions, when I say 7 I don't know, if you had given me, you know, ten 8 minutes of advanced notice I could track down the 9 answer. This was one that I'd -- it would take a 10 while to get to the bottom of it. 11 Q. Okay. Without MLSA payments would you 12 have increased the multiplier from 4X to 20X in 13 the spring of 2020 -- 2010, I'm sorry. 14 A. To be clear, I don't think that 15 actually is true. I don't think that's what had 16 happened. I don't think the multiplier increased 17 to 20X in the spring of 2010. 18 (5/18/10 Advisory Agreement between 19 HEEP Fund and Powhatan Energy Fund, Bates stamped 20 POW_0067 to 0070, was marked K. Gates Exhibit 17, 21 for identification.) 22 BY MR. TAAFFE: 23 Q. Would you look in Exhibit 17, please. 24 A. Seventeen. I'm there. 25 Q. Okay, this is PDF POW lots of zeros 67. 215 1 It's an advisory agreement between HEEP Fund and 2 Powhatan Energy Fund, LLC. 3 Is that right? 4 A. Yeah. 5 Q. Signed 18th of May, 2010, right? 6 A. Yes. I guess that's spring. 7 Q. Yeah, well the multiplier is 20 and I 8 don't know if you consider 18th of May to be 9 spring of 2010 or not. But would you agree with 10 me that 18th of May 2010 is when the multiplier 11 went up to 20X? 12 A. A couple of caveats here. One would be 13 the multiplier didn't go up -- this is a new 14 entity, Powhatan Energy Fund. This is the first 15 advisory agreement that Powhatan -- I believe this 16 may be a copy of the first advisory agreement that 17 Powhatan Energy Fund had with Alan Chen. So 18 Powhatan Energy Fund is separate and distinct from 19 Huntrise Energy Fund. So when you say it went up 20 from -- to 20X, I'm not sure that's a -- a proper 21 phrase, because it really didn't go up from 22 anywhere. It just was determined to be 20. 23 Moreover, I don't think that Alan actually traded 24 for Powhatan on May 18th of 2010. 25 Q. Okay, when prior to this agreement Alan 216 1 Chen's HEEP Fund was trading, he was trading in 2 conjunction with Huntrise, correct? 3 A. Huntrise Energy Fund, yes. 4 Q. Yes. And you, among others, owned 5 Huntrise Energy Fund, right? 6 A. Well, I had an economic interest. I 7 was a beneficial owner. I think Huntrise Energy 8 Fund was owned by Huntrise Fund to Funds. I had 9 an economic interest in Huntrise Fund to Funds. 10 Q. So the entity in which you had an 11 economic interest, that is Huntrise, had a four to 12 one multiplier with HEEP Fund, right? 13 A. I believe that's true. I don't -- I 14 didn't see -- I know we looked at some exhibits 15 earlier that talked about the multiplier. The 16 last one that I recall seeing ended in maybe 17 February or March. I don't know what if anything 18 happened in April and May as it relates to that 19 multiplier. 20 Q. Huntrise shut down in early May of 21 2010. Do you recall that or should I show you a 22 document? 23 A. I don't recall that but I trust your -- 24 Q. Okay. I promise you -- it's my 25 understanding that it's true. 217 1 So when I characterize the multiplier 2 as going from 4X to 20X I -- I guess we can 3 quibble about whether it's increasing or whether 4 there's just a new multiplier. But as it concerns 5 your economic interest and Rich Gates' economic 6 (network interference) provide five times as much 7 to HEEP Fund once Powhatan started -- the Powhatan 8 agreement was signed as compared to when the 9 Huntrise agreement was in effect, right? 10 A. I -- I suspect our -- my -- my personal 11 economic exposure to HEEP Fund's trading increased 12 during this transmission period in May of 2010, 13 yes. 14 Q. And it increased from a multiplier of 15 4X under the -- the Huntrise fund to 20X under the 16 Powhatan fund. 17 Is that right? 18 A. We had to -- there were other changes. 19 My -- my economic interest in Huntrise Fund to 20 Funds may have been different from my economic 21 interest in Powhatan. So there's kind of layers 22 of -- of factors here at play. 23 Q. When you formed Powhatan, did you 24 consider what the initial multiplier should be? 25 In other words, should it be 4X, should it be 20X? 218 1 A. I think you had just showed me an email 2 that had suggested that we had determined it to be 3 20X. 4 Q. Right. 5 A. And, yeah. So I suspect that that's -- 6 that's the case. 7 I think I -- I think I -- 8 Q. The question -- 9 A. I think the -- what it was was 20X 10 because we wanted only -- he gave us concessions 11 on the fee assessment and we wanted the lower fee 12 assessment is what I -- is what I recall that 13 email had sent -- had said. 14 Q. Do you think that the Powhatan 15 multiplier would have been 20X if there no such 16 thing as MLSA payments? 17 A. Well, I'm not even sure that Powhatan 18 would have existed if it weren't for MSLA 19 payments. But I -- I know that he saw MSLA 20 payments in the first half of 2010 and thought 21 them as part of the price signal, considered them 22 part of the price signal and responded accordingly 23 and thought that the overall investment got more 24 attractive on a risk return basis. 25 Q. On Exhibit 17 that we've been looking 219 1 at, it's the advisory agreement between Powhatan 2 and HEEP Fund, if you turn to page -- actually the 3 last page of the exhibit, it's PDF page 62. Let 4 me know when you get there. 5 A. I'm there. 6 Q. It looks like, if I read it correctly, 7 Alan Chen signed on April 14th but whoever it was 8 on Powhatan's behalf didn't sign until May 18th? 9 Do you read it the same way? 10 A. That's consistent with my 11 interpretation. I have -- I don't have a great 12 copy but that seems to be a reasonable 13 interpretation. 14 Q. Do you have a recollection of why it 15 would have taken more than a month for Powhatan to 16 countersign after Chen had signed? 17 A. Maybe -- the answer is no but I can 18 speculate. 19 Q. If you don't recall, that's okay. 20 Flipping up a page or two to PDF pages 21 60 and 61, there is a -- a table that goes across 22 two pages of trading multipliers along with the 23 compensation that Alan Chen would have been 24 compensated and reached multiplier. 25 Do you see that? 220 1 A. I do. 2 Q. The multiplier is initially set to 20X 3 as I think we discussed earlier. 4 Who decided it would start there? 5 A. I assume it was LSE Capital Management. 6 Q. Why would it have been LSE Capital 7 Management as opposed to Powhatan? 8 A. Well LSE Capital Management was the 9 managing member of Powhatan. Powhatan was a -- a 10 passive entity, an investment fund. 11 Q. -- seems to contemplate -- okay. 12 The multipliers seem to range from one 13 to 20 and you started off at 20. 14 Was it contemplated that the multiplier 15 would ever be above 20 and if not why not? 16 A. I -- I don't recall. I don't -- I 17 don't recall but I don't think that there was 18 anything specific about 20 that was -- like a -- a 19 hard maximum. Maybe there was, but I don't think 20 there is anything inherently special about 20. 21 Q. Do you recall the first day that 22 Powhatan started trading? 23 A. I think it was the last week of 2010. 24 Q. The last week of May 2010? 25 A. Yeah. And when you say Powhatan -- 221 1 yes. And to be clear, when you say "Powhatan 2 started trading," I interpret that mean trades 3 were submitted on behalf of Powhatan. 4 Q. That's fair. I'm really asking when 5 its market activity began in PJM. 6 So Powhatan's first trading day was May 7 30th. Do you recall that? 8 A. I don't recall the specific -- 9 Q. Actually, let me -- let me correct 10 myself and make sure I get this right. 11 As I understand it, HEEP Fund placed 12 the first trades for HEEP Fund and Powhatan on 13 Friday, May 28th, and the first trading day for 14 those funds was Saturday, May 29th. 15 Do you recall that? 16 A. I -- I don't specifically recall that 17 but that's was consistent with my general 18 recollection that Powhatan began getting exposure 19 at the end of May of 2010. 20 Q. And the second day of trading was 21 Sunday May 30th and on that day there was a loss 22 of about $400,000. 23 Do you recall that? 24 A. I recall there was a -- I don't 25 remember -- I recall there was a significant loss 222 1 early on in the trading activity. I don't recall 2 the specific day that it occurred I don't recall 3 the specific amount, but what you had just 4 described seems reasonable or consistent with my 5 recollection. 6 (5/30/10 email from Chao Chen to Kevin 7 Gates, Bates stamped POW_4268 to 4269, was marked 8 K. Gates Exhibit 19, for identification.) 9 BY MR. TAAFFE: 10 Q. Sure. Just to make sure I'm not 11 tricking you here, if you go to Exhibit 19, which 12 is PDF page 66. Let me know when you get there? 13 A. I'm sorry, what page did you say it 14 was? 15 Q. PDF page 66. It's Exhibit 19. 16 A. I'm there. 17 Q. Okay. You'll see in the middle of the 18 page an email from you. I don't know who it's to 19 actually but it's on Sunday May 30th in the middle 20 of the day and you write, "Powhatan lost about 21 $400,000 yesterday and today". 22 Do you see that? 23 A. I do. 24 Q. Does that refresh your recollection 25 that May 30th was the -- the day when the big 223 1 losses were happening? 2 A. This seems to suggest it was two days, 3 that it was spread over that weekend, the 29th and 4 the 30th. 5 Q. Yeah. If you go down to the next email 6 below, same page, it's from Alan Chen to you at 7 11:30 in the morning on Sunday, May 30th. 8 Do you see that? 9 A. Mm-hmm. 10 Q. He says, "Yesterday's PnL was a loss of 11 about $29,000". 12 Do you see that? 13 A. I do. 14 Q. So if yesterday's loss was $29,000, 15 that is the loss from Saturday, the total weekend 16 loss was 400,000, would you agree with me that 17 most of it came on Sunday? 18 A. Yes. 19 Q. What is your recollection of what went 20 wrong on the trades on Sunday May 30th? 21 A. So is the question what do -- what did 22 I understand at the time or what do I understand 23 now? 24 Q. No. I know we've been arguing about it 25 for a long time, but what did you understand at 224 1 the time it was happening or shortly thereafter 2 about what had gone wrong? 3 A. And to be clear, I didn't -- I didn't 4 perceive us to be arguing about anything. I was 5 just trying to get clarification on your 6 questions. 7 I don't recall what went wrong but this 8 email thread seems to suggest that we thought that 9 maybe he was trading too many megawatts, that it 10 was capacity -- capacity thing. 11 That's what perhaps what I -- what I 12 considered in May, that he was simply having a 13 market impact and he wasn't making -- he should -- 14 he should reduce his position so he doesn't have 15 it -- marked as below market impact. 16 Q. Is it your understanding that the 17 structure of his trades, that is the nodes 18 involved did not change from what they had been in 19 the past but mainly what changed was the trading 20 volumes involved? 21 A. I -- I don't recall having a clear 22 understanding of which node he traded. Moreover 23 I'm not even sure that I thought that he always 24 traded the same nodes. It's possible that I 25 thought that he was dynamic and trading the nodes 225 1 on any given day in response to the -- the market 2 opportunities -- the opportunities set that the 3 market provided. 4 Q. Alan says in this May 30th email, sent 5 at 11:30 in the morning, which is in the middle of 6 the trading day, as we understand it, so all this 7 is still happening. He says, "Today is a pretty 8 bad day, two major reasons: one, volume too high, 9 two nodes too concentrated". 10 I'd like to unpack each of those a 11 little bit. 12 When he wrote "volume too high," did 13 you have an understanding of how his high volume 14 was leading to these losses? 15 A. It's possible that we thought that he 16 had too much of a market impact. 17 Q. When he said that the nodes were too 18 concentrated, did you have an understanding of 19 what he meant by that? 20 A. Again, I don't -- I don't have a 21 recollection but I can speculate. It -- it's 22 possible he didn't have a diverse enough 23 portfolio, that perhaps, by way of example, he had 24 all of his positions in dominion and some 25 unexpected outage -- you know, by way of example, 226 1 some unexpected outage occurred and he didn't have 2 a diverse enough portfolio and didn't have 3 exposure in Pennsylvania or Ohio. 4 Q. Did this loss surprise you? 5 A. Yeah, I would say you could lose 35% of 6 your investment, sounds like it over 30% of an 7 investment on one day, 35% over a weekend is -- is 8 surprising and -- and concerning. 9 Q. Now you write to your partners -- or at 10 least you write, I can't tell who it's to, on May 11 30th at 12:47 p.m., the second paragraph you 12 write, "The big concern are Alan's comments about 13 high volume. It seems the market isn't as 14 scalable as Alan thought". 15 Were you willing to let Alan continue 16 with the same trading strategy, considering these 17 losses? 18 A. So, we didn't cancel the -- as I -- to 19 the best of my recollection, Powhatan didn't 20 terminate its advisor agreement with Alan. I 21 don't think that we dictated his strategy -- I 22 know we didn't dictate his strategy at all. We 23 didn't really at this point understand it. So -- 24 and I don't know if he continued with the same 25 strategy. Our expectation would be that he would 227 1 kind of respond to the market and learn and grow. 2 Q. In light of that trading volume, did 3 you ask him to reduce his trading volume? 4 A. I don't recall. 5 Q. Did you discuss any changes to his 6 trading strategy at this point? 7 A. At this point that -- that weekend, on 8 Sunday? 9 Q. Or in the -- or on the following days. 10 A. "The following days". 11 I do know when he came to West Chester, 12 I think he came to West Chester about a month 13 later and he described a little bit about his 14 strategy and changes to it. But I don't recall 15 specifically. 16 Q. Okay. And I went for a couple of hours 17 here, so why don't we take a five-minute break and 18 freshen up a little bit. So see everybody back 19 here at let's say 3:45. 20 THE WITNESS: All right, thank you. 21 THE LEGAL VIDEO SPECIALIST: Going off 22 the record at 3:37 p.m. This ends media file 23 number four in the deposition of Kevin Gates. 24 (Recess taken.) 25 THE LEGAL VIDEO SPECIALIST: We are 228 1 back on the record 3:48 p.m. This begins media 2 file number five in the deposition of Kevin Gates. 3 You may proceed, Mr. Taaffe. 4 (6/2/10 email from Alan Chen to Kevin 5 Gates, Bates stamped HF-013539, was marked K. 6 Gates Exhibit 30, for identification.) 7 BY MR. TAAFFE: 8 Q. Mr. Gates, if you'd turn to Exhibit 30, 9 please, PDF page 115. 10 A. I'm there. 11 Q. Okay. The next email down is on 6/1. 12 June 1st from Alan Chen to you, at least it looks 13 that way. He says, "Hi, Kevin. A couple of 14 questions about this email. First of all it looks 15 to us like no trading occurred on Monday May 31st 16 after the big loss and the reason we think that is 17 because here we have an email from Tuesday saying 18 yesterday's PnL was zero". 19 So would you agree with us that no 20 trading took place in these accounts the day after 21 the large loss that is Monday, May 31st? 22 A. So I'm not sure when you -- what you 23 mean when you say trading, but typically -- not 24 typically, all the time trades are submitted on 25 one day and then they settle the following day. 229 1 So when you say trading, it sounds like 2 you're talking about settlement activity whereas 3 the trading activity would have taken place the 4 day prior. 5 Q. Fair clarification. 6 Would you agree that no trades were 7 placed on Sunday May 30th to settle on Monday May 8 31st? 9 A. Based upon the limited documents that 10 I've seen that seems quite reasonable. 11 Q. Did you have a conversation with Alan 12 or any communications about taking a day off on 13 Monday May 31st? 14 A. I -- I don't recall. 15 Q. Did you instruct him not to trade on 16 Monday the 31st? 17 A. I don't recall. My -- my -- if I were 18 to speculate I would say no. We typically 19 don't -- I typically don't like to micromanage 20 traders and would want Alan to -- especially like 21 somebody who doesn't fully understand. So I -- I 22 think if I were to -- I -- I don't know but I 23 would speculate that I did not ask him to take the 24 day off. 25 Q. You, by which I mean the defendants in 230 1 this case, have not produced any written 2 recommendations -- any written communications 3 between you and Alan Chen on Monday May 31st. 4 Nothing wrong with that if there were no such 5 communications but do think that you did 6 communicate with him on Monday May 31st or do you 7 have no recollection? 8 A. So the answer is I don't know but I 9 would highlight that it's possible to communicate 10 with him besides written communication. So it's 11 possible that we had a phone call. 12 Q. Yep. That was my next question. 13 Do you recall whether you had a phone 14 call? 15 A. I don't recall. 16 Q. Would you have expected to have of a 17 phone call the day after a large loss like this? 18 A. I mean, I could have spoken to him on 19 Sunday night, even -- or sometime on Sunday as 20 well. 21 Q. Okay. A mathematical mystery to us 22 that maybe you could help with. You said on 23 Exhibit 30, June 1st as I understand it is the 24 first day of June. That's when this was written. 25 And it says, "The month-to-day-profit and loss is 231 1 negative 22,000 and today's profit and loss is 2 negative -- is negative 7,000". 3 So if it's the first day I don't 4 understand why those numbers with not be the same. 5 Do you have any insight? 6 A. I can speculate. 7 Q. Sure. 8 A. So maybe he -- when he did his 9 calculations that he now -- the third bullet point 10 "Today's PnL" includes settlement -- settlement up 11 until hour ending 12, but the month-to-day PnL he 12 also includes costs for the entire day or it may 13 even include costs for the next day as well. 14 Q. Are -- are you speaking with any degree 15 he of confidence or are you speculating only? 16 A. I'm speculating only that I remembered 17 taking a deep dive into this years ago and I -- I 18 think it's -- it's something -- I'm confident that 19 it's something as simple as that. 20 Q. Okay. 21 A. It's just a goofy accounting thing 22 where he's included some totals in the first 23 bullet point and not in the third bullet point. 24 Q. You write the same day, June 1st, in 25 the evening, after trading closed, "Sorry to 232 1 bother you but I'm curious to know how the last 2 seven years have gone". And he writes back that, 3 "The month-to-day PnL is now a $15,000 loss". 4 In terms of asking how the last seven 5 hours have gone, why -- why did you check on 6 the -- the status with that degree of frequency? 7 A. So I don't think I -- I don't think I 8 always did that. Moreover I think I didn't always 9 check on it with -- with that degree of frequency. 10 This -- I think I was just perhaps shell shocked 11 from the previous weekend's activity and just 12 nervous that there would be some sort of 13 autocorrelation, meaning he lost money on the 14 weekend and he's going to continue losing money. 15 Q. Are you aware as you sit here today 16 that, beginning on June 1st and going forward, 17 those are the trades that FERC has alleged are 18 manipulative? 19 A. As I sit here today I think that, yeah, 20 the FERC's trading -- the supposedly manipulative 21 trades were the ones were in June. I think it was 22 after the -- the losses. 23 Q. In the days after the large loss, that 24 is to say the days in early June, did you have an 25 understanding of how Alan Chen's trading strategy 233 1 had -- had changed? 2 A. I don't recall. I speculate that maybe 3 he -- well, he highlighted his loss and said that 4 he -- I think we -- we spoke about this before our 5 break, that it was too high a volume and it was 6 not a diversified enough portfolio. So perhaps I 7 speculated that he wanted to get a more 8 diversified portfolio and would increase his 9 volumes of trades. 10 Q. Did you come to understand that 11 beginning on June 1st he put on what he referred 12 to as fully hedged trades? 13 A. Do I come to understand? Yeah, I think 14 I understand as I sit here today now that he began 15 doing -- trading trades from A to B and from B to 16 A, submitting trades like that. I don't recall 17 him describing them as fully hedged, but I 18 remember that -- that those are the -- I guess 19 when we just got the -- the trades it was 20 supposedly fraudulent, that's what we had done. I 21 remember looking at that Excel spreadsheet that 22 FERC had provided at the end of this year. 23 (8/24/10 email from Alan Chen to Kevin 24 Gates, Bates stamped POW_4722 to 4725, was marked 25 K. Gates Exhibit 28, for identification.) 234 1 BY MR. TAAFFE: 2 Q. All right. If you would turn to 3 Exhibit 28. That's PDF page 109. 4 A. Right. 5 Q. This is an email chain from August of 6 2010. Alan Chen writes to you on August 24th, "Hi 7 Kevin. No, before June 1st we didn't have any 8 fully hedged pair trades. We did have paired 9 trades on almost from the beginning, not intended 10 for TLC but the spread since we didn't even have 11 TLC at the time. 12 "On May 30th we lost a lot of money on 13 the one pair of trades and I tried to find a 14 better hedged pair of trades. That's when I 15 thought of using fully hedged paired trades. 16 "On June 1 we only had one pair with 17 limited volume. For the fully hedged trades I 18 have all 24 hours with flat volume. We don't have 19 these kind of trades rejected". 20 Does there refresh your recollection 21 that Alan trade -- Alan Chen referred to the 22 summer 2010 trades as fully hedged? 23 A. Well, it's refreshing my recollection 24 I don't believe he -- I don't believe that that's 25 the case. I don't believe that he was referring 235 1 to the summer of 2010, all of his summer of 2010 2 trades as fully hedged, but at least a subset, 3 yes. 4 Q. Okay. When did you understand that his 5 trades had shifted from A to B, B to C, let's call 6 them to A to B, B to A? 7 A. It sounds like I -- I learned it on 8 August 24th of 2010. 9 Q. Well, I -- I'm not asking that you read 10 this email. So it shouldn't say "it sounds like". 11 I'm asking you in your mind when did 12 you learn that? 13 A. In my mind. 14 Q. Let me be more specific. Maybe it's 15 helpful, maybe it's not, but you mentioned Alan 16 Chen visited West Chester in June of 2010 and 17 discussed the trading strategy. So, I don't know, 18 maybe he talked about the change there, or maybe 19 it was some other time. 20 But my question was when the first time 21 you learned of the change in strategy was? 22 A. I, I -- I'm not sure is the answer. I 23 don't know. But if I were to speculate I would 24 speculate that I learned about it on August 24th 25 when I read this email of what he was -- he had 236 1 changed from his trading activity. 2 I first learned -- I believe I first 3 learned of the fully -- of what we're describing 4 as the fully hedged trades, or -- but I don't -- I 5 think that's kind of a -- a misnomer. But I'll 6 refer to them as A to B, B to A trades. I learned 7 of those trades I believe at the end of June of 8 2010 but I wasn't aware that that was a change -- 9 I -- I'm not sure that I was aware and I don't 10 think I was aware that that was a change that he 11 had implemented as -- as a result of that large 12 drawdown. 13 So that's why I think that on August 14 24th, about two months later, is when I learned 15 that that was a change that he had done as a 16 result of his May 30th drawdown. 17 (6/7/10 email from Alan Chen to Kevin 18 Gates, Bates stamped POW_3761 to 3775, was marked 19 K. Gates Exhibit 20, for identification.) 20 BY MR. TAAFFE: 21 Q. Would you turn to Exhibit 20, please, 22 two zero, that's PDF page 68. 23 A. Yes. 24 Q. If you flip a couple of pages into this 25 exhibit, all the way to PDF page 71 -- let me know 237 1 when you get there. 2 A. I'm there. 3 Q. There is an email at the bottom from 4 you to Alan Chen dated Wednesday June 2nd, so a 5 couple of days after the big loss, and it says, 6 "Hi, Alan. To follow up on an email from 2.5 7 months ago, I'm wondering if we could take you up 8 on your offer to visit with us to talk about TLC 9 trades and the relationship in general. Please 10 let me know your availability later this month or 11 in July". 12 Why did you rekindle a discussion from 13 2.5 months ago at this point about his visiting 14 West Chester? 15 A. I don't know. I can speculate. 16 Q. What would you speculate? 17 A. As a direct result of his trading -- 18 the trading losses the prior weekend. He had 19 described these in prior communications to us and 20 you highlighted to me previously he described 21 these trades as risk free or almost -- I think his 22 language was "almost risk free" is how he 23 described them and we just realized significant -- 24 the fund just realized a significant risk. 25 So I wanted to say, hey, there's a -- a 238 1 disconnect here, I'm highly conflicted, I'm 2 getting conflicting information from you or 3 signals from you and I want to better -- try to 4 better understand what's going on here. 5 Q. If you would turn to page one of this 6 exhibit. That's PDF page 68. 7 A. Mm-hmm. 8 Q. This is -- the second email down is 9 from Alan a Chen to you dated June 7th -- do you 10 see that one -- at 9:57 p.m.? 11 A. I do. 12 Q. He says, "I'll take you up on your 13 offer for transportation". I think he's talking 14 about coming to West Chester. And then he says, 15 "For the last few hours we are losing quite a bit 16 of money and for the whole day it is probably 17 approaching negative 60,000. But we are still 18 making more than 40,000 up to date (due to the 19 updated TLC data of 6/2) making $63" -- 63,000 20 maybe -- "instead of losing $56,000. 21 "I think optimistically we could have 22 made more than 100,000 once the TLC data are 23 published". 24 Were you surprised to learn at this 25 point that transmission loss credits were turning 239 1 losing days into winning days? 2 A. I'm not sure. So to be clear, I'm not 3 sure that that's what this email says. On 6/2 -- 4 so, he sends me this email on Monday the 7th. 5 He's referring to trading activity from five days 6 prior. And I think what he's doing, he's making 7 assumptions about the TLC and then once the TLC is 8 updated, he updates it. 9 As I think you know, Damon, the TLC was 10 variable and varied day to day, I think it varied 11 hour to hour and it wasn't published but for 12 month's after -- or days after the fact. 13 So I think what he's saying here is, 14 hey, actually, you know, we're not doing well now 15 but I gave up an overly conservative estimate on 16 June 2nd and -- on the TLCs. It's published 17 information. It's been positive. 18 Q. At this point, that is around June 7th 19 2010, did you understand that Alan Chen had 20 started putting on trades with the A to B, B to A 21 structure? 22 A. I don't so. I think I knew of that 23 structure or he -- he told me about that structure 24 later that month when he visited Pennsylvania is 25 my -- my best recollection of when I first learned 240 1 of that. 2 Q. Okay. I -- I thought you said a minute 3 ago that you first learned of it in the -- the 4 August 24th email. 5 So maybe just to clarify, when do you 6 first think you learned of the A to B, B to A 7 structure? Was it in the West Chester meeting in 8 June? 9 A. Yeah, it was the West Chester meeting 10 in June. In August I -- I think is when I learned 11 that that was a change that he had made. I didn't 12 realize -- as a -- I think as a result of his 13 losses at the end of May is when I learned that 14 the A to B, B to A was a change as a result of 15 those losses. 16 So I was not -- I was aware at -- at 17 the end of June that he was doing that and then a 18 couple months later realized that that was a 19 change as a result of -- his modifications and the 20 change -- as a result of losses that he incurred 21 in the market. 22 (6/14/10 email from Kevin Gates to Alan 23 Chen, Bates stamped POW_4837 to 4841, was marked 24 K. Gates Exhibit 35, for identification.) 25 241 1 BY MR. TAAFFE: 2 Q. Would you turn to Exhibit 35, please. 3 That's PDF page 124. 4 A. Yes. 5 Q. The second email down, Alan Chen to 6 you, the second paragraph writing to Kevin, he 7 says, "I think recent increased exposure won't 8 materially affect the profitability. As a matter 9 of fact, we increased volumes but decreased risks. 10 "If we rate the risk on May 30th at 11 1.0, we now have probably 0.5. As a result the 12 reward also decreased. So I've intentionally re 13 reduced the risk and somewhat the profitability". 14 Given that, doesn't this suggest that 15 this telling you that the structure of the 16 trades -- because there's a different risk 17 structure after 5:30 than before 5:30? 18 A. Do I think the increased exposure. 19 Yeah, this is -- yes, that's true. So 20 I -- I knew that he was responding to the market 21 condition -- or -- or really our investor, our 22 risk tolerance at that point. But, yes, did I -- 23 I'm not sure -- at this point I didn't know about 24 A to B, B to A trading. 25 Q. But you knew you that his trading 242 1 methodology had changed in order to increase 2 volumes and decrease risk after May 30th, right? 3 A. I knew that he from -- this -- this 4 email suggests that as of June 10th he was telling 5 me that he increased volume but decreased risk 6 relative to ten days earlier. 7 Q. Right. What's your understanding of 8 how he could have increased volumes but decreased 9 risk as of June 10th? 10 A. As an initial matter I'm not even sure 11 I believed him. I mean, I'll -- I'll highlight 12 that he had told us that prior to May 30th that it 13 was almost risk free. So, I think I had told you 14 that I was -- we had received conflicting 15 information from Alan over the different -- over 16 the prior -- over the years I guess and this -- at 17 this point in time I'm probably more wary of him 18 that I have been say two weeks prior, because 19 things that he had previously told me turned out 20 not to be true. 21 So anyway, if you want me to speculate 22 of what he could do, there's a whole host of 23 things that he could do to increase volume and 24 decrease risk. You could trade in different parts 25 of the market that are not known to have -- by way 243 1 of example, different parts of the market that are 2 not known to have congestion. 3 Q. Okay. There came a point I think 4 you'll agree with me when you understood Alan Chen 5 was making A to B, B to A trades, right? 6 A. That's true. 7 Q. What did you understand the strategy to 8 be from those trades? That is, is what is the 9 reason that they should make money on the whole? 10 A. It was basically a -- well, I think 11 he -- he had told us at the end of June -- he told 12 us about it. I think I would argue he gave us 13 misleading information about it, but he -- as I 14 understood it, it was kind of a -- a fixed or 15 floating slot. Basically, you know, the 16 definition of an investment, you put money into a 17 box and then days later you find out what comes 18 out of the box. So it was investing, largely 19 investing as the function of TLCs exceeding the -- 20 the fixed costs of the trade. 21 Q. What did you, in the summer of 2010, 22 perceive the risks of that trading strategy to be? 23 A. There are a couple of risks, anyways, 24 one most notably that the TLCs would not exceed 25 the fixed cost of the trade. Certainly with the 244 1 benefit of hindsight we know that they generally 2 did but prospectively we had no assurances that 3 that was the case. Moreover, I perceived risk 4 that one of the legs wouldn't get on, and to the 5 extent one leg wasn't accepted or it was reject in 6 the part, that we would have a large risks going 7 into the real-time market. 8 Q. Did the possibility that one leg might 9 not clear concern you? 10 A. I believe it did. 11 Q. Was it something that you wanted to 12 happen or something you wanted to avoid? 13 A. At the time I think it was something 14 that I perceived as something that we wanted to 15 avoid, that this goes back to I think Alan didn't 16 give us a full story of -- of what he was doing. 17 By way of example, he never even informed us of 18 the possibility of bidding below the $50 bid cap 19 and that he was actually doing -- indeed doing 20 that. 21 Q. Yeah, first I'd just like to -- as you 22 are -- focus on -- on what you understood as of 23 summer of 2010. 24 Did Alan Chen ever suggest to you that 25 it was a potential source of profit to have one 245 1 leg of an A B, B to A trade break? 2 A. I suspect he -- I don't recall but I 3 suspect he -- he may have. 4 Q. Did he ever say it was desirable to 5 have that happen? 6 A. I don't recall. 7 Q. Did Alan Chen take steps to minimize 8 the risk of a leg breaking? 9 A. To the contrary. I think he did the 10 exact opposite. 11 Q. He -- he took steps to increase the 12 likelihood of a leg breaking? 13 A. Yes. 14 Q. How -- how did he do that, in your 15 understanding? 16 A. He reduced his big cap. 17 Q. Is this something that you understood 18 at the time that he was trying to -- to do, to 19 increase the risk of a leg breaking? 20 A. No. 21 Q. Did Alan Chen ever tell you in the 22 summer of 2010 that it was part of his trading 23 strategy to have one leg of an A to B, B to A 24 trade break? 25 A. I'm not sure I understand that 246 1 question, but we knew that that was a risk that 2 was in the portfolio, yes. 3 Q. From June 1st, 2010 to August 19th 4 2010, neither Powhatan nor HEEP Fund ever had a 5 leg of an A to B, B to A trade get rejected, 6 right? 7 A. I actually don't -- do not believe that 8 is the case. 9 Q. Would you turn to Exhibit 28, please, 10 PDF 109. 11 A. I'm there. 12 Q. In the middle email from you to Alan 13 Chen, August 24th, 2010 you write, "Hi, Alan. Do 14 you have an example of a day when you bid in two 15 legs of a trade and only one side was accepted?" 16 And he responds. "Hi, Kevin. No". 17 And he goes on, "Before 6/1 we don't have any 18 fully hedged paired trades". 19 And in the last paragraph he says, "For 20 the fully hedged trades I have all 24 hours on the 21 flat volume. We don't have this kind of trades 22 rejected". 23 Does that refresh your recollection -- 24 recollection about whether any of the A to B, B to 25 A trades were rejected in this time period? 247 1 A. The -- the answer is no, but if I could 2 give you more color. 3 I think what you're asking for is how 4 do I reconcile my previous statement with this 5 email, and I think subsequent to this email I've 6 come to learn that this email provides incorrect 7 information. 8 Q. Okay. Please say more about that. Was 9 a -- a leg of A to B, B to A trade rejected in 10 this time period? 11 A. I believe it may have been, yes. 12 Q. When you say you believe it may have 13 been, are you saying you believe it was or 14 speculating? 15 A. I -- I believe it. I believe that legs 16 were rejected and I believe that they were for A 17 to B, B to A, or not accepted in full. 18 Q. Do you know what days those were? 19 A. No. 20 Q. You've mentioned two risks associated 21 with A to B, B to trades: the first one that the 22 transaction loss credits may not exceed the 23 transaction costs, and the second one being that 24 one leg might not get on and that would create a 25 large risk. 248 1 Are those, as you sit here today, the 2 only two risks that you perceive with this trading 3 strategy or are there other risks that you can 4 think of at this point? 5 A. I'm sorry, we're talking market risks? 6 Those are the only two market risks that I can 7 think of. 8 Q. Do you think that UTC trading using an 9 A to B, B to A structure takes skill? 10 A. Yes. 11 Q. What kind of skill does it take? 12 A. There's a -- a whole bunch of skills to 13 take. 14 So I think -- again, I'll -- I'll 15 highlight. We're looking at a -- a return stream 16 with the benefit of hindsight. Prospectively we 17 perceived a lot of risk with these trades. 18 Identifying the trades takes skill, the technical 19 skill to submit the trades, process the trades. 20 There's skill with hours of the day, how -- how 21 you allocate, what megawatts you put on, so on and 22 so forth. 23 Q. I think -- I think on -- on that point, 24 if I can just jump in. 25 In the email that we've been talking 249 1 about that is Exhibit 28, Alan wrote, "For the 2 fully hedged trades, I have gone all 24 hours with 3 flat volume". 4 So as I understand that at least he was 5 trading all hours of the day with the same volume 6 without the sort of tailoring that you -- that you 7 just described. 8 Do you have a different understanding? 9 A. Well, I -- I don't know if this 10 conflicts with what I had said. I said -- I said 11 a whole host of things including which nodes to 12 pick and maybe an aggregate. 13 I don't know how to interpret this 14 email. To be fair, you know, this is not -- this 15 is -- by this time I've already received two 16 emails that he sent that have just been incorrect. 17 But given the benefit of the doubt to say that 18 this is correct, I could imagine a situation where 19 an aggregate is flat volume across all A to B, B 20 to A trades, but it's dynamically allocated across 21 paths throughout the day. 22 But, yeah, I -- I think that there -- 23 to answer you specifically, yes, I think that 24 there was -- there is skill here, but on the flip 25 side -- 250 1 Q. You talk about the -- the risks that -- 2 A. I'm sorry. I was -- you had cut me 3 off. I think we have latency but if I could 4 finish my thought. 5 With the benefit of hindsight, I stand 6 by my statement that a monkey randomly spreading 7 trades into this market should have -- expect to 8 make money. I think every single market 9 participant made money in this market in 2010. 10 So I think a -- it didn't require to be 11 a profitable trader in 2010. Again, with the 12 benefit of hindsight, there was no skill necessary 13 to select the nodes in the paths. 14 Q. You talked about the -- the risks that 15 "we" perceived, "we" being a quote that I think 16 that -- it's a term you used. 17 Who were the "we" that were considering 18 the risks involved in these trades in the summer 19 of 2010? 20 A. Who is the "we"? I mean, I don't -- I 21 need to look at a specific thing. 22 As I look at this email, the exhibit 23 that I'm on now, "we" is in the first sentence and 24 I think that means -- when Alan uses that I think 25 he means HEEP Fund and Powhatan. From time to 251 1 time I've used "we" to mean different things. 2 Q. In summer of 2010 did anybody at 3 Powhatan conduct a written analysis of the trades 4 that Chen was putting on? 5 A. I don't recall. 6 Q. What's your understanding of why PJM 7 allowed UTC trades? 8 A. I'm sorry, what's my "understanding of 9 why PJM allowed UTC trades in the -- in 2010"? 10 Q. That's right. What -- what function 11 did they serve such that PJM created that type of 12 trading product? 13 A. I -- I don't know. 14 Q. Do you have any understanding of how 15 UTC trades benefited the market? 16 A. "Benefited the market". 17 I mean -- they -- they benefited the 18 market in a -- in a -- in a host of ways, perhaps, 19 but I'm not a -- you know, I'm not a policy guru. 20 I -- I didn't establish this market and I really 21 wasn't involved at all in any way, shape or form 22 in the -- in the -- in the -- in the markets 23 beyond as a passive investor in -- in 2010. 24 Q. We talked earlier in the day about -- 25 I'm sorry, I think we had a little latency there. 252 1 Didn't mean to talk over you. 2 We talked earlier in the day about the 3 fact, I think I explained it, that generally 4 speaking trades caused price conversions, right? 5 A. I don't recall the specific 6 conversation that you speak of. 7 Q. I asked you I think, when you increase 8 trading volume, doesn't that flatten your profit 9 opportunity? 10 Do you recall that conversation? 11 A. I -- I -- I don't recall -- I don't 12 recall the specific -- it's been a long day. But 13 -- 14 Q. It has. Generally speaking, do you 15 remember the -- the email chains that we talked 16 about in spring 2010 where you were asking Alan 17 Chen how much capacity could the market bear in 18 this sort of trading that he was doing without 19 reducing his profit potential? 20 A. Yes. 21 Q. And I think you explained -- tell me if 22 I'm wrong -- that when you increase volume on a 23 spread trade, that that has the effect of driving 24 together the spread, such that the more volume you 25 put on the lower your -- your profit is. That's 253 1 the point. 2 Is that fair? 3 A. I don't recall specifically making make 4 that statement. 5 I recall describing it as buying only 6 one position, not necessarily a spread trade. But 7 I said if you buy an illiquid stock, pretty soon 8 you're going to start driving that stock up, to 9 the point where -- we talked -- I know, we talked 10 about the concept of price discovery in the past. 11 Q. Does UTC trading with a structure of A 12 to B and B to A lead to price discovery? 13 A. I believe it does. 14 Q. How? 15 A. Well, I -- I believe if -- if a leg 16 doesn't clear it has the ability to be profitable 17 going into the real-time market. So with the 18 benefit of hindsight it helps converge in the 19 real-time market. 20 I also would say that an A to B, B to A 21 trade, I mean they're not all -- they're not all 22 equal. An A to B, B to A, it's -- for A to B, B 23 to A are electrically identical, then I'm not 24 sure. There may even be price discovery there, 25 but there's no profit potential. But I know that 254 1 there's a potential of making or losing money. 2 And have you ever heard the -- the -- the phrase 3 "a bird in the hand is worth two in the bush," and 4 you're paying money into PJM with an uncertain 5 payout coming back. 6 Q. Let's put aside the circumstance where 7 one leg doesn't clear. I understand that you 8 contend that's a possibility, but let's just 9 assume that there's an A to B, B to A trade where 10 both legs clear. 11 In that circumstance where both legs 12 clear, does an A to B, B to A UTC trade cause 13 price convergence? 14 A. I don't know, but it may. 15 Q. In the circumstance where both legs of 16 an A to B, B to A trade clear, does that trade 17 benefit the market in any way? 18 A. Yes. 19 Q. How? 20 A. Well, to the extent it provides price 21 discovery, that's one way. The other benefit to 22 the market is what I had just described, a -- a 23 bird in the hand is worth two in the -- two in the 24 bush. You're guaranteeing the market -- I mean, 25 it's a definition of an investment. You're 255 1 putting an amount in and you get an uncertain 2 payment out at some point in the future. And 3 markets, you know -- the market likes fixed 4 payments, known payments. So, it's a significant 5 benefit. 6 Q. Do you recall a series of 7 conversations, they might have been by email, but 8 between you and a guy named Bob Steele in the 9 summer of 2010? 10 A. I remember communicating with Bob. I 11 think I may have even met with him in 2010. 12 (6/25/10 email from Kevin Gates to Chao 13 Chen, Bates stamped POW_2438 to 2445, was marked 14 K. Gates Exhibit 22, for identification.) 15 BY MR. TAAFFE: 16 Q. Let me show you one of the emails 17 between you two. Can you turn to Exhibit 22, 18 please. That's PDF 85. 19 A. I'm there. 20 Q. It looks like he sent you or maybe his 21 team sent you a presentation in June of 2010 and 22 you'll see that in the second email down Chao Chen 23 responds to you and several others on June 25th at 24 20:48. 25 Do you see that? 256 1 A. I do. 2 Q. And Chao Chen writes, "I just write the 3 presentation. I'm not that excited about it. I 4 think UTC is just a loophole that anyone who knows 5 about it can exploit. There is very little skill. 6 I wouldn't hire any of these guys to work for TFS 7 including Alan". 8 Do you agree with Chao Chen's 9 assessment that there is very little skill 10 involved in UTC trading of the sort that Alan was 11 doing? 12 A. "That Alan was doing". 13 So -- so I think with the -- the 14 benefit of hindsight, again I'll reiterate and say 15 that I think a monkey trading in these markets 16 could have made money. I think that every market 17 participant made money in these markets. 18 So with the benefit of hindsight, yes, 19 I think that skill is not necessary, just being 20 there and in the markets was all that was 21 necessary to make money. 22 Q. Right, but -- but you responded an hour 23 later with, "I agree that UTC is a loophole that 24 probably a dummy can exploit". 25 So it doesn't sound like you're really 257 1 talking about in retrospect. Didn't you think 2 that this was an obvious loophole at the time Chao 3 Chen said it? 4 A. I -- I'm sorry, could you -- could 5 repeat that? 6 Q. Sure. I think I -- I asked you to 7 react to Chao Chen's statement. You said that you 8 agreed that in retrospect, looking back, everybody 9 made money, right? 10 A. Right. 11 Q. And I -- I'm respectfully following up 12 by pointing to your email an hour later responding 13 to Chao Chen where you said "I agree that UTC is a 14 loophole that probably a dummy can exploit. 15 A. Yes. 16 Q. And I'm suggesting that the fact that 17 you said that an hour after Chen's ' message, in 18 response to the Chen's message, suggests that this 19 idea of UTC being a loophole is not 20 something that's obvious in retrospect, it looks 21 like it was something that was clear to you on 22 June 25th of 2010. 23 Is that true? 24 A. That was in -- during the trading 25 activity, yes. 258 1 Q. Do -- why did you believe that UTC was 2 a loophole in -- on June 25th, 2010? 3 A. I don't recall. 4 Q. What's your definition of a loophole as 5 it relates to trading in this type of market? 6 A. Well, I guess, generally my definition 7 of a loophole is something that's typically 8 unforeseen and not identified advance. So 9 actually as I sit here today I don't -- I actually 10 don't think up to congestion was a -- a loophole 11 in any reasonable interpretation of the 12 definition. I think it was -- it was exactly as 13 it was designed in that the government itself 14 predicted and -- the exact response and behavior 15 that the people would have. 16 So at the time I thought loophole and I 17 still think loopholes are typically things that 18 are not foreseen and somebody, you know, takes a 19 deep dive into a prospectus or -- or something 20 like that and sees something that everybody else 21 doesn't see, at this point I think that that was 22 not the case and that the people that were more 23 kind of involved in the market -- Bob Steele 24 himself, knew that there was a structure 25 opportunity here and that everybody who engaged in 259 1 these markets knew that there was a very 2 attractive risk return profile. 3 Q. As of June 25th, 2010, though, you 4 thought that UTC was a loophole that probably a 5 dummy could exploit, right? 6 A. I agree that the -- this copy of the 7 email that you sent, that's -- it says "I agree 8 that UTC is a loophole that probably a dummy could 9 exploit". 10 Q. And you were telling the truth when you 11 wrote that to Chao Chen and Rich Gates, right? 12 A. I -- I suspect I was. I -- I don't 13 believe -- I know I wasn't sworn under oath when 14 I -- when I sent that email, but I -- I've no 15 reason to believe that I would have provided 16 misinformation. 17 Q. Given your view at that time at least 18 that UTC was a loophole that any -- any dummy 19 could exploit, do you still agree that Chen's 20 trading took skill to execute? 21 A. Yes. I think it took skill to be in 22 the markets. Yes. And with the benefit of 23 hindsight, you know, I think that there's skill to 24 know what -- what markets to engage in. 25 Q. So, finding a loophole was a skill? 260 1 (Brief interruption) 2 A. Sorry. 3 "Finding a loophole". 4 With the benefit of hindsight, I don't 5 think this actually was a loophole in the -- in 6 the traditional sense that I'm describing. And -- 7 but what would be involved in these markets is -- 8 just being in the markets, you know, it's like 9 when you -- have you ever been to a -- a 10 Campground of America? You know, you go camping 11 with the kids or something and they have a fishing 12 pond and you throw a line in and you catch a fish, 13 within ten seconds. That's -- is that fishing? 14 I -- I don't know. 15 This -- this market here, you know, you 16 could -- there are some traders that were better 17 than other traders, or some fisherman at 18 Campground of America that were better than other 19 fisherman at Campground of America. Some guy 20 catches seven fish and some guy catches 10 fish 21 and perhaps the guy who catches more fish has 22 actually more skill, but they're both catching an 23 inordinate amount of fish. 24 Q. So some people have more skill at 25 driving a truck through loopholes than other 261 1 traders? 2 A. I don't believe that that's what I had 3 said. 4 Q. Well, I'm reading from your email. You 5 responded to Chao Chen and said, "I agree that UTC 6 is a loophole that probably a dummy can exploit 7 but why rule those guys off? Just because they 8 are doing UTC? They should drive a truck through 9 that loophole, even if they know how that FTRs, 10 ICE or Virtuals. That's what I'd do". 11 So I'm still just trying to understand. 12 If -- if there is a loophole that a dummy can 13 exploit, where does the skill fit in? 14 A. Some -- in constructing a -- I guess 15 the best I can do is the analogy I gave you. If 16 you go to Campground of America and everybody is 17 catching fish, some people are catching more fish. 18 Some people don't have to waste as much bait to 19 collect the fish. They could be better fishermen. 20 Q. Okay. Are you aware that other UTC 21 traders considered strategies to make money by 22 targeting MLSA but think didn't pursue the 23 strategies because they thought it was improper to 24 do that? 25 A. I am not aware of that, no . I don't 262 1 think. As I sit here today right now I don't 2 recall that. 3 (9/13/10 email from Robert Steele to 4 Kevin Gates, Bates stamped POW_1865 to 1868, was 5 marked K. Gates Exhibit 6, for identification.) 6 BY MR. TAAFFE: 7 Q. Would you turn to Exhibit 6, please, 8 PDF page 17. 9 A. Yes. 10 Q. This is an email between you and Robert 11 Steele, whom I called Bob Steele earlier, in late 12 summer and -- and fall of 2010. If you turn to 13 page two, there's a lengthy email from Robert 14 Steele to you on August 20th, 2010. 15 Let me know when you see that. 16 A. I think I have it. 17 Q. Okay. At the very bottom, paragraph 18 three, Mr. Steele writes, "How did this all get 19 started? The following outline, it's my 20 understanding -- not necessarily absolute truth -- 21 one market participant, perhaps Mr. Chen, figured 22 out the 'free arb' via the transmission loophole. 23 "Most UTC participants (myself and 24 Connective included) received this as rank 25 manipulation of the intended market function and 263 1 had enough sense not to participate in this 2 activity. Don't kill the goose that laid the 3 golden egg. 4 "Based on the transparency that exists 5 by the purchase of transmission, two other UTC 6 traders figured out the gaming trade and couldn't 7 resist from hitting it hard. This got the 8 attention of PJM and the Market Monitor," and then 9 it goes on. You can read it if you want to. 10 But does this refresh your recollection 11 that Mr. Steele thought that the type of UTC 12 trading that targeted TLC payments was improper? 13 A. Well, this confuses me a little bit. I 14 don't even know what he's talking about here when 15 he talks about a "free arb" because I don't know 16 what free arb he's speaking of. There -- there is 17 no such thing has a free arb. Moreover he's 18 clearly conflicted out when he says don't kill the 19 golden -- "don't kill the goose that laid the 20 golden egg". So I'm not sure if he does indeed 21 believe that because I think he was trying to do 22 as much trading as he could and extract gains from 23 the fund and he wanted not to draw too much 24 attention to it and he was -- I suspect he was 25 collecting a lot of money from the transmission 264 1 loss credits and he didn't want them to go away 2 and perhaps trading activity, like Dr. Alan 3 Chen's, highlighted what was going on here, that 4 these MSLA were higher than the fixed costs -- 5 Q. Are you speculating now? 6 A. Yeah, I'm speculating. 7 Q. I'm sorry to -- we're having some 8 latency issues and I'm missing some of what you're 9 saying and talking over you so I apologize for 10 both halves of that. 11 But when you talk about things that Mr. 12 Steele might have been doing to take advantage of 13 this loophole, are you speculating or are you 14 saying that you know that it's the case that he 15 was doing the same sort of trading that HEEP Fund 16 and Powhatan were doing? 17 A. Well, I look at the phrase don't -- 18 don't kill the goose that laid the golden egg, and 19 I guess it's speculation, but my interpretation of 20 that is he's saying, hey, there's a structural 21 problem here in this market, let's not draw too 22 much attention to it so we can extract renal 23 assistance as long as we can. 24 Moreover, I -- I'm not speculating, but 25 I have no idea -- I have no idea what he's talking 265 1 about as it relates to "free arb". That makes no 2 sense to me because there was no free arbitrage -- 3 I think when he says "free arb," I think he means 4 free arbitrage and there was nothing of the sort 5 involved here. 6 Finally, I will also say that this was 7 a heavily -- still is unfortunately a heavily 8 politicized market and emails like this wouldn't 9 surprise me from somebody who was trying to 10 distance themselves and give themselves political 11 cover. 12 Q. When you responded later that day by 13 saying, "Thanks for the help Bob. I'll reach out 14 to Carol Smoots later this morning. Your summary 15 is so good below that I'm not sure that I should 16 be wasting your time by talking later this 17 afternoon". 18 Did you mean that to be critical of his 19 summary or pushing back on it in some way? 20 A. I think I -- I -- I don't know I can 21 speculate. As an initial matter I believe I 22 discussed this in one of my earlier depositions, 23 this specific topic, but again it was my belief 24 that there was no value in speaking to him. He 25 had already shown his true colors by some of those 266 1 comments that -- that I didn't believe were -- 2 were true and -- well I knew were not true. 3 And when he wrote, "don't kill the 4 goose that laid the golden egg," you know, I think 5 as in -- as in -- quoted in the paper -- well, 6 I've seen people discuss that -- you know, that, 7 to the extent that Alan Chen's trading activity 8 highlighted to the marketplace that PJM was paying 9 people to take transmission service out of the 10 system, that's actually a -- there are benefits to 11 society for that. 12 (7/6/10 email from Alan Chen to Kevin 13 Gates, Bates stamped HF-01400 to 01, was marked K. 14 Gates Exhibit 23, for identification.) 15 BY MR. TAAFFE: 16 Q. Please turn to Exhibit 23, PDF page 93. 17 A. Yes. 18 Q. You write in a second email down, from 19 you to Alan Chen, July 5th, "Hi, Alan". Skipping 20 down to the second paragraph, "I forget. How did 21 we leave it regarding reporting for spreads when 22 you didn't get on both legs and when you did get 23 the second leg on but that the spread was greater 24 than 45 and less than 50? Were you just going to 25 add comments to the texts of your daily email that 267 1 you send around at 12:30 p.m. Eastern or would you 2 send a separate email when the day-ahead prices 3 were reported at 4:00 p.m. Eastern?" 4 Why did you ask Chen to report to you 5 when a leg was rejected? 6 A. I don't recall why I -- I don't recall 7 sending this email in July of 2010. It was over 8 11 years ago. But I can speculate that it was a 9 result of a meeting that I may have had -- that I 10 had had with him I believe at the end of June, so 11 maybe a couple weeks prior where he discussed 12 the -- the risk of a leg not clearing. 13 (7/13/10 email from Alan Chen to Kevin 14 Gates, Bates stamped HF-014071 to 014075, was 15 marked K. Gates Exhibit 24, for identification.) 16 BY MR. TAAFFE: 17 Q. Turn to Exhibit 24, please, PDF page 18 95. 19 A. Before we do that, one other thought 20 is, at this time when I sent this email, it's my 21 recollection that I wasn't even aware that you 22 could or that he was reducing his big cap. 23 So this email assumes -- I believe at 24 this time I believe that the bids were always at 25 50. I didn't know -- I don't believe I knew and I 268 1 don't believe he told me that it could be less 2 than 50, moreover that he was intentionally 3 sometimes bidding less -- oftentimes bidding less 4 than 50. 5 BY MR. TAAFFE: 6 Q. Okay. If you would turn to Exhibit 24, 7 please. 8 A. I'm there. 9 Q. This is an email chain from July of 10 2010. If you'll turn to page two of that exhibit, 11 there's an email at the bottom from 11:14 a.m. on 12 July 12th, 2010 that looks pretty normal and has 13 month to date PnL, yesterday's PnL and today's 14 PnL. It mentions congestion showing up and rain 15 sweeping through the Mid-Atlantic. 16 Do you see that? 17 A. I do. 18 Q. And then later that day the email 19 above, Chen writes, "Hi, Kevin. Powhatan's total 20 loss would probably be around $600,000 for today". 21 Do you see that? 22 A. I do. 23 Q. Do you remember that day with heavy 24 losses in July 2010? 25 A. I do not. 269 1 Q. You wrote to Alan July 12th, 2010 at 2 7:47 p.m., "Alan, thanks for sending. To clarify, 3 this loss wasn't the result of your not getting 4 both legs of the trade on, right? It was a result 5 of there being a day-ahead real-time spread 6 between nodes that were paired at the same 7 interface". 8 Do you see that? 9 A. Yes. 10 Q. I don't read anything in Alan's emails 11 to you that suggests the reasons for the trade or 12 says that the loss was not the result of a leg 13 breaking. 14 So I'm wondering how you inferred that 15 the loss was not the result of a leg breaking? 16 A. I don't know. I can speculate. But I 17 believe it was a prior exhibit -- or the prior 18 exhibit that you had showed me, which is the email 19 prior, where I asked that if he would send me 20 reports when the day-ahead congestion was -- when 21 a leg didn't clear or when it came close to not 22 clearing, meaning it was -- the day-ahead spread 23 was greater than $45. 24 So I think I had, after that June 25 meeting, had set up -- actually had set up a kind 270 1 of protocol or a procedure where he would notify 2 me if that risk was materializing or if it was 3 close to materializing. 4 Q. Did you think this was an A to B, B to 5 A sort of trade? 6 A. Did I think -- I -- I don't recall. I 7 don't think that that's necessarily suggested 8 anywhere in here. 9 Q. Yeah. If -- if there were an A to B, B 10 to A trade and a leg weren't rejected, can you 11 think of any reason why there might have been a 12 $600,000 loss? 13 A. Yes. 14 Q. What reason could you think of? 15 A. If the MLSA payment was significantly 16 lower than expectations or the costs of trading 17 was significantly higher than expectations. 18 Q. Scrolling up to the email above that, 19 do you see the email on July 13th from you to Alan 20 Chen? 21 A. I see one sent at 6:24 in the morning. 22 Q. That's the one, bright and early. 23 You wrote to Alan, "Good morning, Alan. 24 Skipping down a little bit. "This is the second 25 time we've had a pretty big daily loss. The other 271 1 was at the end of May. Both times you attributed 2 part of the loss to our high trading volumes. You 3 also told us that Powhatan is by far the largest 4 trader of UTC at PJM and when you came to West 5 Chester at the end of June, I believe that you 6 indicated you'd be decreasing our volume in July. 7 But I think there were only two days in June you 8 had more volume than you did yesterday". 9 Why would Chen have reduced his trading 10 volume in the summer months? 11 A. I'm sorry, are you -- a hypothetical 12 example with he would -- or why -- it doesn't 13 appear that he -- I'm suggesting that he did. 14 Q. No, I agree. It doesn't look like he 15 did. But it looks like -- I mean, I believe you 16 indicated that you would be decreasing your volume 17 in July and possibly you were expressing surprise 18 that he didn't, although you can speak to that. 19 My -- my question is whether you had 20 some expectation that he would be reducing his 21 trade volume in July? 22 A. Your original or your previous question 23 was in the summer months. I consider June be to 24 part of the -- one of the summer months. But the 25 answer is I don't know, but it -- it seems that, 272 1 I -- at least I thought that he indicated that he 2 would be increasing -- in the June meeting that he 3 indicated that he would be decreasing his volume 4 in July and that didn't materialize. 5 Why would he do that? I don't know. 6 July typically is warmer than June and maybe it 7 was just a risk mitigation technique that the -- 8 the -- the same volume of trading activity in June 9 would take on too much risk in July. Maybe -- and 10 this is -- this is speculation, maybe it was this 11 perverse issue with HEEP incentives and he -- he 12 had locked in gains in June and wanted to make 13 sure that he could capitalize on the performance 14 reallocation in that, which I think he got a 15 portion of that, was supposed to get a portion of 16 that every three months. 17 Q. Okay. 18 A. But I -- I don't know. 19 (7/22/10 email from Kevin Gates to 20 Richard Gates, Bates stamped POW_2081 to 2082, was 21 marked K. Gates Exhibit 25, for identification.) 22 BY MR. TAAFFE: 23 Q. Okay. Moving on to Exhibit 25, please, 24 PDF page 98. 25 A. Yes. 273 1 Q. This is an email from you to some of 2 your investors on Thursday July 22nd, 2010. I 3 think it has to do with the Bob Steele interview 4 process. You can see there's some resumes 5 attached, one of which is B Steele resume, and 6 you're setting up interviews in this email. 7 Going down almost to the bottom there's 8 a paragraph that says "Kevin, specific business". 9 Do you see that? 10 A. I do. 11 Q. And it says, "Will you be willing to 12 trade personal monies? Why are partnering with 13 the two other guys (sic)? Thoughts on 14 noncompete". And then, "What happens after the 15 opportunities at PJM end?" 16 Why did you think the opportunities at 17 PJM might end? 18 A. I don't recall. 19 Q. What opportunities were you referring 20 to? 21 A. I don't know. I can speculate that it 22 was the opportunities as described in their -- 23 their business proposal. 24 (TFS Capital document dated July 28, 25 2010, Bates stamped POWDC_1965 to 1966, was marked 274 1 K. Gates Exhibit 32, for identification.) 2 BY MR. TAAFFE: 3 Q. Turn to Exhibit 32, please, PDF 117? 4 A. Yes. 5 Q. Bullet point one, this is from you to 6 Larry Eiben and Rich Gates, July 28th, 2010. It 7 proposes a forced redemption of about 3.8 and in 8 the note paragraph about halfway down, it says, 9 "Our aggregate and original subscriptions was 10 about 4.4M and we're distributing 3.8M. I 11 estimate that by the end of August we'll have 12 already distributed our entire initial investment. 13 That will make the eventual blowup more 14 palatable". 15 What blowup are you referring to? 16 A. I think this is similar -- I think you 17 showed me a document earlier in our deposition 18 today where we talked about -- where I mentioned 19 blowups and it was just the fact that we were 20 trading large megawatts and I perceived there to 21 be a lot of risk in this investment. 22 Q. Did you consider the blowup to be 23 eventual, that is something that was going to 24 happen sooner or later, or did you just think it 25 was a possibility? 275 1 A. Well, eventually everything blows up. 2 So, I thought that -- it seems that I suggested it 3 was eventual. So, more than just a -- a 4 possibility, but all investments eventually blow 5 up. I don't often talk about it that way. 6 (8/18/10 email from Chao Chen to Kevin 7 Gates, Bates stamped POW_4685 to 4689, was marked 8 K. Gates Exhibit 26, for identification.) 9 BY MR. TAAFFE: 10 Q. Would you turn to Exhibit 26, please, 11 PDF page 100. 12 A. Yes. 13 Q. Can you turn to the second page of that 14 email chain. That's PDF page 101. There is 15 two-thirds of the way down an email from Alan Chen 16 to you, Thursday August 5th, 2010 at 2:35 p.m. 17 Do you see that? 18 A. Yes. 19 Q. He writes, "Hi, Kevin. From what I'm 20 hearing now we are going to see drastic changes to 21 UTC trade very shortly. Also TLC and UTC issues 22 (uneconomic large-volume UTC trades taking 23 advantage of TLC) and resolutions are going be to 24 on August 12th Market Committee meeting," I think. 25 Any idea why Alan Chen brought this to 276 1 your attention? 2 A. I suspect he brought it to my attention 3 because it affected Powhatan Energy Fund's 4 expected investment opportunity set going forward. 5 Q. Did you consider the Heep/Powhatan 6 trades to be "uneconomic, large-volume UTC trades, 7 taking advantage of TLC"? 8 A. Did I consider that, I'm sorry? 9 Q. Yes. 10 A. Yes. 11 Q. In what sense were they uneconomic? 12 A. I don't know. I -- I don't believe 13 that I -- to the contrary, I -- I believe I 14 perceived them the exact opposite. 15 I believe that language was language 16 that was copied from a -- perhaps a Market Monitor 17 or a PJM presentation or -- or discussion, but 18 that's not language that I could think of as 19 coming from Alan. So I -- I -- it wouldn't 20 surprise me. And I'm speculating, but it wouldn't 21 surprise me. That's not even his -- his actual 22 language if he's borrowing that from someone else. 23 Q. Did you consider the trades that 24 Powhatan and HEEP Fund were doing at this point to 25 be uneconomic, large-volume UTC trades taking 277 1 advantage of TLC? 2 A. No, no. 3 Q. Then why would he bother to -- to tell 4 you the changes would impact you? 5 A. So -- I -- I think he thought that the 6 changes would impact us but I don't think that 7 Powhatan was doing large -- uneconomic 8 large-volume UTC trades taking advantage of TLC. 9 Q. If you go up to the previous page in 10 the PDF, page 100, August 12th 2010 email at 4:18 11 p.m. at the bottom. 12 Do you see that? 13 A. Mm-hmm. 14 Q. All right, you respond to Alan, "If PJM 15 files the amendment next week, when do you think 16 that the change will take place? I'm correct in 17 believing that you'll still be able to profitably 18 trade but won't be able to keep the TLC (we just 19 won't be able to make money by moving money around 20 in a circle). And so, it's like how life was back 21 in 2008 before they started reimbursing us for 22 TLC". 23 Then you say a couple of other things 24 including, "Either way my guess is that Powhatan 25 will likely want to decrease its leverage". 278 1 So a couple of questions, what did you 2 mean he'll no longer be able to make money by 3 moving electricity around in a circle? 4 A. I -- I don't know. That statement 5 doesn't make any sense to me. 6 Q. Did it make sense to you when you wrote 7 it? 8 A. I don't know. I mean, I -- the -- I'll 9 note that the sentence prior has something in 10 there that doesn't make sense to me now either and 11 I don't think it would have made sense to me at 12 the time. 13 Q. Is it possible that him saying you 14 won't be able to money by moving electricity 15 around in a circle, that will be A to B, B to A 16 trades would not be profitable? 17 A. That's certainly possible, yes. 18 Q. In your A to B, B to A trades, did any 19 of the profit come from the spread as we've been 20 discussing it or was all of the profit from TLC 21 payments? 22 A. So as an initial matter, I'm not sure 23 what -- when you say the spread as we've 24 describing it, I think that the spread does 25 include TLC -- a reasonable interpretation of the 279 1 spread, of the "spread," using air quotes, does 2 include the TLCs. A spread trade is two 3 offsetting positions where they're not wash -- 4 they're not wash trades, they're not exactly, but 5 they could be very similar. And this spread 6 trades here, A to B, in no circumstance did it 7 equal B to A and oftentimes at least one of those 8 legs included TLCs. 9 So the spread trade, my interpretation 10 of the term spread trade includes TLCs. That 11 aside, I also know that -- or I believe that some 12 of the trades were not accepted in their entirety. 13 Moreover I believe that some of the A to B, B to A 14 trades didn't have equal megawatts on. 15 So I -- I haven't done a deep dive kind 16 of forensic accounting of -- of all of those 17 issues, but I do know that it was heavily driven 18 by the -- the -- the TLC. 19 Q. When you say at the end, "Either way, 20 my guess is that Powhatan will likely want to 21 decrease its leverage," is that due to the lack of 22 TLC payments? 23 A. I can speculate. Well as an initial 24 matter, that -- that sentence also doesn't make 25 any sense to me because I don't think Powhatan had 280 1 any leverage back in 2010. 2 As I think of leverage I think of, as I 3 mentioned earlier in this deposition, of investing 4 with borrowed money and Powhatan, to the best my 5 knowledge, didn't have any -- any leverage at all. 6 It was fully capitalized. 7 But so that I'm not sure I fully 8 understand the -- meaning of that sentence, but 9 I -- I could speculate that maybe I was saying 10 that it would decrease its -- either its ratio or 11 its overall risk profile exposure and that, yeah, 12 that very well could have been because of the 13 reduction of the -- the removal of the TLCs from 14 the -- from the marketplace. 15 MR. TAAFFE: Okay. I know it's been a 16 long day and I projected we would end around 5:00. 17 I have a little bit more but hopefully it won't be 18 much. 19 MR. PERKINS: Do you have a sense of 20 how much, Damon? 21 MR. TAAFFE: Maybe ten minutes, ten, 22 fifteen minutes. 23 MR. PERKINS: Okay. Kevin, you good? 24 You need to take a break or keep going? 25 THE WITNESS: No, I'm good. 281 1 BY MR. TAAFFE: 2 Q. Is it fair to say you've spoken with a 3 number of journalists about this investigation and 4 case over the years? 5 A. I think that's true. 6 Q. Do you recall a conversation in 2014 7 with a Bloomberg reporter named Tom Schoenberg? 8 A. I think that might have been one of the 9 exhibits in the deposition that Rich had. It 10 was -- Tom was mentioned in one of the exhibits in 11 a deposition that was conducted last week for my 12 brother Rich. 13 (4/9/15 email from Kevin Gates to Tom 14 Schoenberg, Bates stamped POWDC_9078 to 9079, was 15 marked K. Gates Exhibit 33, for identification.) 16 BY MR. TAAFFE: 17 Q. I think you're right. I don't want to 18 make a guess, though. If you'll go to Exhibit 33, 19 which is PDF 119 please. 20 A. Yes. 21 Q. You write in the second paragraph to 22 Mr. Schoenberg, "Also, to be clear, Powhatan is 23 unaffiliated with TFS Capital," and then in all 24 caps, CAN YOU PLEASE MAKE THAT CLEAR". 25 Is that still your view today? Is that 282 1 a true statement? 2 A. I'm not sure what that meant. I mean, 3 legally they're -- they're separate entities. I 4 don't know what a -- I don't know exactly what I 5 meant when I said unaffiliated. With -- 6 Q. Well, first of all, if -- if you don't 7 know what it meant, why did you write in all 8 capital that "you should make it clear"? 9 A. I -- I don't know what I meant at the 10 time when I wrote that. Maybe I meant that 11 there -- TFS Capital is not managing the money, 12 TFS capital is not trading the money, it's not TFS 13 Capital's clients that are invested in the fund. 14 (TFS Capital, LLC incorporation 15 document, Bates stamped POW_1488 to POW_1489, was 16 marked K. Gates Exhibit 34, for identification.) 17 BY MR. TAAFFE: 18 Q. Would you turn to Exhibit 34, please. 19 I'm -- I'm very sorry we're having latency issues 20 again. Can you guys hear me? 21 MR. PERKINS: Yes. 22 BY MR. TAAFFE: 23 Q. Would you turn to Exhibit 34, please. 24 It's PDF page 122. 25 A. Yes. 283 1 Q. This is the incorporation document in 2 the State of Delaware for Powhatan, do you see 3 that, Powhatan Energy Fund, LLC? 4 A. When you say it's an incorporation 5 document, I -- I don't know -- I see something 6 that says "State of Delaware, Secretary of State". 7 It's not obvious to me this is an incorporation 8 document, though. 9 Q. All right, you're paying for something 10 called a formation fee. Do you see that? 11 A. Yeah, looks like an invoice. Yeah. 12 Q. So this has something to do with 13 founding Powhatan Energy Fund, LLC, Secretary of 14 State of the State of Delaware. 15 Is that fair? 16 A. I -- I don't know. I'm not familiar -- 17 I didn't do a lot of the -- this type of work, but 18 it looks -- it looks like it's a kind of formal 19 document from the State of Delaware. That appears 20 to be true. 21 Q. The -- the mailing address for this 22 Powhatan Energy Fund filing is TFS Capital. 23 Do you see that? 24 A. No. 25 Q. If you go up about six lines from 284 1 Powhatan Energy Fund, LLC, there is a number and 2 then under that there is an address beginning with 3 TFS Capital, 1800 Bayberry Court or Bayberry. 4 Do you see that? 5 A. Yeah. I -- I actually scrolled to the 6 next page which appears also be to part of the 7 exhibit. It's a Bates number ending in 1489 and 8 it says the address of its registered office in 9 the State of Delaware is 1209 Orange Street in the 10 City of Wilmington, and I -- I suspect that's 11 Wilmington, Delaware. Then it gives the ZIP Code 12 of 19801. So I think -- I believe that to be the 13 address. 14 Q. Okay. Returning to the page that I was 15 asking you about, which is page one of the 16 exhibit -- 17 A. I -- I thought you were asking -- 18 Q. It looks like -- 19 A. I thought you were asking about the 20 exhibit overall. Go ahead, I'm sorry. 21 Q. Sure. I just -- the question's pretty 22 straight forward I hope, which is that above the 23 description of what's being paid for, that is 24 something having to do with Powhatan Energy Fund, 25 LLC's formation, there is a mailing address, TFS 285 1 Capital, LLC. Do you see that? 2 A. I see TFS Capital, LLC and then it says 3 1800 Bayberry Court, Ste 103, Richmond, Virginia. 4 Q. Right, okay. Doesn't it look from that 5 document like there's some relationship between 6 TFS Capital, LLC and one called Powhatan Energy 7 Fund, LLC? 8 A. Not necessarily -- no, not necessarily. 9 I mean I'd note that a lot of the emails that went 10 back and forth that were cited earlier were emails 11 on TFS Capital, but that doesn't mean that their 12 emails are associated -- that the fund was 13 associated with TFS Capital. 14 By way of example, I can sent an email 15 on Gmail about a fund and that doesn't mean that 16 fund is related to Google in any way. 17 This -- this could have been an 18 operational thing. In the same way that Larry was 19 sending emails from his work account, which 20 happened to be where he was at the time, and this 21 is where he wanted documents to be sent because 22 this was his -- his day job. 23 It seems a lot more clear to me as I 24 look at this second page, again Bates number 25 ending in 1489, that it has a different address in 286 1 Delaware. 2 Q. Okay. Did you give a speech to the 3 Cato Institute in 2014? 4 A. I -- I know I was asked to be on a 5 panel at Cato at some point. 2014 seems 6 reasonable to me as a -- as a time frame. 7 (6/4/14 email and attachment from Doug 8 Gates to Kevin Gates, Bates stamped POWDC_8573 to 9 8582, was marked K. Gates Exhibit 4, for 10 identification.) 11 BY MR. TAAFFE: 12 Q. Would you turn to Exhibit 4, please, 13 which is page five of the PDF. 14 A. Sorry, page five. Yeah, I see that. 15 Q. Yeah, email from somebody named Doug 16 Gates to you dated June 4th, 2014. It has an 17 attachment called draft.docx. 18 Do you see that? 19 A. I do. 20 Q. Who is Doug Gates? 21 A. I believe this Doug Gates has an older 22 named Doug Gates. I believe that's my older 23 brother, one of my older brothers. 24 Q. He attached a document that I have also 25 attached in different pages. I -- I have some 287 1 questions about it. The first one is just do you 2 recognize this document? 3 A. It's been in -- it looks like 4 something -- I think it rings a -- yeah, I think I 5 recognize this document as certainly something 6 like it, yes. 7 Q. Did you write this document? 8 A. I don't believe I did. 9 Q. Do you think Doug wrote it? 10 A. If I were to speculate, I would say, 11 yes, I think Doug wrote this. 12 Q. It looks like notes for a speech that 13 you may be giving. Do you agree with me or is 14 this something else? 15 A. Yes. 16 BY MR. TAAFFE: 17 Q. Does Doug Gates have -- well, let's go 18 back to 2014 when he wrote this. 19 At the time did he have any knowledge 20 about the investigation into Powhatan other than 21 what he may have heard from you or from Rich? 22 A. He may have. I -- I don't know what he 23 knew. I -- I believe this is after FERC 24 Litigation went live, so it's possible that he 25 spent time there. 288 1 Q. Why would Doug have sent you notes for 2 a speech? 3 A. I don't know. Maybe he was trying to 4 help me out. 5 Q. Do you know what speech this was for? 6 A. I mean, I -- over the years I spoke at 7 a -- I've been asked to speak at various things. 8 I -- I think I've been on Fox TV. I spoke at an 9 OISHI (phon) event, something women's committee in 10 energy in the environment. I spoke at Fox Nagle 11 Trader Conference. 12 Q. This would have been prepared for 13 something particular though in 2014, wouldn't it 14 have been? 15 A. Yeah -- that seems to be the case, but 16 I -- I don't know when -- and I also spoke at a 17 couple of -- I went down to Houston at one point 18 and spoke at a -- a law firm conference and 19 elsewhere. 20 So I -- I'm not sure that this 21 necessarily was specific to CATO but it could have 22 been. 23 Q. Is -- was Doug writing on a blank page 24 here or was he revising in some way a draft that 25 maybe you sent him for his thoughts? 289 1 A. I don't recall. 2 Q. If you go to page two of this draft, 3 there's something called "2. The Setup". 4 Do you see that? 5 A. Yeah. I notice that the -- "The 6 Setup" -- the first paragraph is a little bit 7 incorrect. It is true that at one point I 8 considered going to dental school. The -- the 9 truth is I actually was accepted into the 10 University of Pennsylvania Dental School, but I 11 opted not to pursue it because I would have been 12 an awful dentist since I don't like teeth. 13 Q. Yeah, there's a lot of them. 14 The next paragraph is, "In 2010, I 15 contracted with a trader to trade in the 16 electricity market. This guy was engaged to do 17 the newest stuff and was investing his personal 18 money in the PJM electricity market. With his 19 help, we quickly lost $400,000"... 20 Next page, "then he discovered these 21 things called rebates. I won't bore you with the 22 details, but the market was designed to pay 23 rebates to traders under certain circumstances to 24 compensate them for electricity that was lost in 25 transmission from one place to another. 290 1 "We figured out how to collect these 2 rebates and build a trading strategy around it. 3 In the next two months we made 7M, mostly in 4 rebates." 5 Would you characterize that -- those 6 two paragraphs as correct? 7 A. Well, I think the first paragraph that 8 I mentioned was -- was incorrect. The second 9 paragraph is your first paragraph I guess, but the 10 second paragraph in the section I think is 11 correct. The third paragraph I think is 12 incorrect, because "he then discovered these 13 things called rebates" is -- is incorrect. We 14 were obviously aware of rebates prior to his 15 losing money at the end of May and I don't believe 16 it's correct to say we made $7M. I think that 17 that's a -- I don't think that the money was near 18 that amount. 19 Q. Is it correct to say, "We figured out 20 how to collect these rebates and built a trading 21 strategy around it"? 22 A. No, that's actually also not correct. 23 I didn't -- Alan -- Alan had -- or HEEP Fund had 24 sole discretion. We didn't understand how to 25 collect any rebates and build a trading strategy 291 1 around them. 2 Q. Turn to -- 3 A. Doug's no -- yeah, so far this thing's 4 riddled with errors here. 5 Q. If you turn to PDF page 14. Let me 6 know when you get there. 7 A. I'm there. 8 Q. Third paragraph says, "But this FERC 9 thing is something different. They're using 10 bullying tactics and little common sense to 11 prosecute us for following their rules in the 12 hopes of simply chocking up another win". 13 That's not true, is it? 14 A. You know, you went out there a little 15 bit, Damon. 16 Q. Sorry. I read the statement, "Their 17 settlements are secret," meaning FERC's 18 settlements are secret. 19 You'd agree that that's not true, 20 wouldn't you? 21 A. Yeah, I think a lot of -- I'm aware of 22 settlements that FERC is engaged in where there's 23 some information that's released but defendant's 24 can't speak openly. There -- there are NDAs 25 associated with them. 292 1 Q. Are you aware of any settlements we've 2 reached that are not reflected on the FERC 3 website? 4 A. So when you say the settlements, I 5 think what I'm -- what I believe -- the answer is 6 no. I think that all settlements are described on 7 a high level and perhaps -- but I -- I think 8 they're also coupled with nondisclosure agreements 9 and other information where the information 10 isn't -- exactly what had happened wasn't fully 11 transparent and isn't fully transparent to the 12 market participants. I -- I do know that there 13 are nondisclosure agreements that are -- there are 14 oftentimes part of settlements. 15 Q. By "nondisclosure agreement" you mean 16 an agreement to neither admit nor deny a 17 allegation? 18 A. No, I think that there is something -- 19 I know that I have spoken to people over the years 20 who are unable to speak openly to me about it 21 because of agreements that were put in place. 22 Q. Also on this page, about a paragraph 23 down, it says, "Their behavior" -- I think FERC's 24 behavior it means -- "is not helping the market. 25 It's scaring people away. We'll never trade in 293 1 electricity again because to one knows what will 2 get them in trouble". 3 That that statement is not accurate, is 4 it, that you'll never trade in electricity again 5 as of 2014? 6 A. As a point in time, I could have -- I'm 7 not sure if that's true. It is true that I am 8 trading in these markets again. At that point in 9 time I'm not sure if that was my position, but it 10 is true that I am trading in these markets again. 11 Q. Elmagin was founded in 2014, wasn't it? 12 A. I don't recall. 13 Q. It says on its website it is, if you'll 14 accept my representation. 15 A. Sure. 16 Q. And it -- it trades power, right? 17 A. It trades power? It trades in the 18 power markets. I'm not sure it's accurate to say 19 it trades power. 20 MR. TAAFFE: All right, we're either at 21 the end or very nearly there. Can you guys give 22 us three minutes to --to huddle and maybe we can 23 wrap things up? 24 MR. PERKINS: Okay. 25 THE LEGAL VIDEO SPECIALIST: Going off 294 1 the record 5:24 p.m. 2 (Recess taken.) 3 THE LEGAL VIDEO SPECIALIST: We are 4 back on the record, 5:26 p.m. 5 MR. TAAFFE: Mr. Gates, at this time I 6 have no further questions. Thank you for your 7 time today. I know it's been a long day. 8 At this point your counsel, Mr. 9 Perkins, may ask you questions if you and he would 10 like to, but certainly no obligation to do so. 11 MR. PERKINS: And -- and this is Chris. 12 I don't have any questions for Mr. Gates. 13 MR. TAAFFE: Okay, then we're done. 14 THE LEGAL VIDEO SPECIALIST: This is 15 the end of the deposition. The time is 5:26 p.m. 16 and we're off the record. 17 MR. PERKINS: I -- I neglected at the 18 end of Richard's to indicate he would read and I 19 assume, Kevin, you would want to do the same. 20 (Time noted: 5:26 p.m.) 21 22 23 24 25 295 1 ERRATA SHEET FOR THE TRANSCRIPT OF: Case Name: FERC vs. Powhatan Energy Fund, LLC 2 Dep. Date: 10/25/21 Deponent: Kevin Gates 3 CORRECTIONS: 4 Pg. Ln. Now Reads Should Read Reason ___ ___ ___________ _____________ ______________ 5 ___ ___ ___________ _____________ ______________ ___ ___ ___________ _____________ ______________ 6 ___ ___ ___________ _____________ ______________ ___ ___ ___________ _____________ ______________ 7 ___ ___ ___________ _____________ ______________ ___ ___ ___________ _____________ ______________ 8 ___ ___ ___________ _____________ ______________ ___ ___ ___________ _____________ ______________ 9 ___ ___ ___________ _____________ ______________ ___ ___ ___________ _____________ ______________ 10 ___ ___ ___________ _____________ ______________ ___ ___ ___________ _____________ ______________ 11 ___ ___ ___________ _____________ ______________ ___ ___ ___________ _____________ ______________ 12 ___ ___ ___________ _____________ ______________ ___ ___ ___________ _____________ ______________ 13 ___ ___ ___________ _____________ ______________ ___ ___ ___________ _____________ ______________ 14 ___ ___ ___________ _____________ ______________ ___ ___ ___________ _____________ ______________ 15 ___ ___ ___________ _____________ ______________ 16 _____________________ Signature of Deponent 17 SUBSCRIBED AND SWORN BEFORE ME 18 THIS____DAY OF_____________, 2021 19 _________________________ (Notary Public) 20 MY COMMISSION EXPIRES: ________________________ 21 22 23 24 25 296 1 ACKNOWLEDGEMENT OF WITNESS 2 I, KEVIN GATES, do hereby acknowledge 3 that I have read and examined the foregoing 4 testimony, and the same is a true, correct and 5 complete transcription of the testimony given by 6 me, and any corrections appear on the attached 7 Errata sheet signed by me. 8 __________________ ______________________________ 9 (DATE) (SIGNATURE) 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 297 1 CERTIFICATE OF NOTARY PUBLIC 2 I, Kim M. Brantley, C.S.R., the officer 3 before whom the foregoing deposition was taken, do 4 hereby certify that the witness whose testimony 5 appears in the foregoing deposition was duly sworn 6 by me; that the testimony of said witness was 7 taken by me in stenotype and thereafter reduced to 8 computerized transcription under my direction; 9 that said deposition is a true record of the 10 testimony given by said witness; that I am neither 11 counsel for, related to, nor employed by any of 12 the parties to the action in which this deposition 13 was taken; and, further, that I am not a relative 14 or employee of any attorney or counsel employed by 15 the parties hereto, nor financially or otherwise 16 interested in the outcome of the action. 17 ___________________________ KIM M. BRANTLEY, C.S.R. 18 Notary Public in and for the District of Columbia 19 20 My Commission Expires: 21 December 14, 2024 22 23 24 25