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United States Securities and Exchange Commission v. Romer

United States District Court, E.D. Michigan, Southern Division

July 17, 2019

ERNEST J. ROMER, III, Defendant.



         The United States Securities and Exchange Commission (“SEC”) filed this civil enforcement action under the Securities Act of 1933, 15 U.S.C. §§ 77q(a), and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10-b thereunder, 15 U.S.C. § 78j(b), 17 C.F.R. § 240.10b-5, asking the Court to enjoin Defendant Ernest J. Romer, III from continuing to violate federal securities law and to order him to disgorge profits obtained as a result of activity that violated these laws. Defendant never filed any responsive pleading engaging with the allegations set forth in the Complaint and, more generally, has taken no steps to defend this lawsuit. The Clerk of Court entered default against Defendant on October 30, 2018 and the SEC subsequently filed a motion requesting that the Court enter a judgment of default under Rule 55(b)(2) of the Federal Rules of Civil Procedure. Because Defendant has received sufficient notice of this lawsuit and has also been advised of the Clerk's entry of default and given an opportunity to appear at a hearing on this matter, yet has completely failed to respond in any way, the Court will grant the SEC's motion (ECF No. 15).


         Defendant, formerly a registered broker-dealer associated with CoreCap Investments, Inc., defrauded at least 30 of his retail brokerage customers out of approximately $2.7 million from 2014 through 2016. ECF No. 1 PageID.1 (Compl.). Between July 30, 2018 and October 9, 2018, Defendant pled “no contest” to thirteen counts of felony embezzlement in Macomb County Circuit Court, Michigan, in thirteen separate cases, in violation of Mich. Comp. Laws § 750.174. On this conviction, Defendant received a sentence of 85 to 240 months in prison and was ordered to pay a total of $2, 650, 000 in restitution. As of the date of this order, Defendant is incarcerated in Newberry Correctional Facility, in Michigan.

         On September 18, 2018, the SEC filed this federal civil action alleging that Defendant participated in a fraudulent scheme to offer or sell securities through instruments of interstate commerce, in violation of Sections 17(a)(1), 17(a)(2) and 17(a)(3) of the Securities Act. ECF No. 1 (Compl.). The SEC further avers that Defendant violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by making false statements of material fact in connection with the purchase or sale of securities.

         The SEC's factual allegations are that Defendant persuaded at least 30 of his customers to sell securities in their CoreCap Investments account and then transfer the proceeds to either P&R Capital, LLC or CoreCap Solutions, LLC, both of which were Defendant's “personal businesses and had no relationship to CoreCap Investments.” ECF No. 1 PageID.1-2. In total, 22 customers sent $1, 962, 887 to P&R Capital and 11 customers sent $738, 200 to CoreCap Solutions. See ECF No. 1 PageID.5. According to the Complaint, Defendant represented to customers that, after transferring their money to P&R Capital and CoreCap Solutions, “he would invest their money in the stock market and earn them a better return than their current investments.” Id. These statements, according to the SEC, were false; Defendant never invested his customers' money in the stock market for their benefit. Id. Instead, he stole the money for his own personal use, comingling approximately $2.7 million in customer funds with his advances from CoreCap Investments and using approximately $3.5 million for trading in his personal brokerage accounts. ECF No. 1 PageID.2, 6; ECF No. 15-2 PageID.153 (Wilburn Saylor, Jr. Decl.). The SEC further alleges that Defendant used approximately $714, 000 of his customers' money for personal expenses, paid $343, 000 of it to prior customers of his who had suffered losses in 2010-2011, sent $302, 000 to customers of CoreCap Investments who requested that he return some of their funds, and gave $41, 000 to family members. ECF No. 1 PageID.2, 6. See ECF No. 15-2 PageID.153 (Saylor, Jr. Decl.) (providing exact figures).

         Defendant was served with the Complaint on September 26, 2018 but missed the October 17, 2018 deadline to file a responsive pleading. See ECF No. 6 (Serv. Return). No. attorney filed any notice of appearance on Defendant's behalf, and the Court has received no communication whatsoever from him. After Defendant missed the responsive pleading deadline, on October 30, 2018 the SEC asked the Clerk of Court to enter default against Defendant “for failure to plead or otherwise defend.” ECF No. 7. That same day, the Clerk entered the default. ECF No. 8. This Court then issued an order instructing the SEC to submit a memorandum and affidavit setting forth the factual and legal basis for default judgment, including “facts showing an entitlement to the specific monetary and/or equitable relief requested.” ECF No. 9. The SEC then filed the instant motion for default judgment, accompanied by an affidavit and supporting exhibits, on March 5, 2019. ECF No. 15.

         On May 9, 2019, the Court issued an order notifying Defendant that a hearing on the motion for default judgment was scheduled for July 17, 2019 and specifically ordered that he “communicate with the Court by sending a letter post-marked within 30 days of the date of th[e] Order expressing whether he wishes to attend the hearing” so that the Court could take necessary steps to ensure his transport to the hearing. ECF No. 17. The order, which was served on Defendant, further warned that, should he “express no interest in attending the hearing, or fail to respond as directed, the hearing will proceed as scheduled . . . and default judgment may be entered against him in the amount of $2, 755, 737, and prejudgment interest thereon in the amount of $18, 724.” ECF No. 17. See Text-Only Certificate of Service re ECF No. 17 (dated May 9, 2019). The Court never received any response from Defendant.


         Rule 55(a) of the Federal Rules of Civil Procedure requires that, “[w]hen a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or otherwise, the clerk must enter the party's default.” When a party then asks the court to issue a judgment of default under Rule 55(b)(2) of the Federal Rules of Civil Procedure, “the district judge is required to exercise sound judicial discretion in determining whether the judgment should be entered.” Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 2685 (4th ed. 2019). See Fed. R. Civ. P. 55(b)(2).

         Judgment by default is considered “a drastic step which should be resorted to only in the most extreme cases.” United Coin Meter Co., Inc. v. Seaboard Coastline R.R., 705 F.2d 839, 845 (6th Cir. 1983). In determining whether entry of default judgment is appropriate, courts may consider a number of factors, including the amount of money involved; whether there are material issues of fact; whether the plaintiff has been substantially prejudiced by the defendant's delay; and whether the default was caused by a good-faith mistake or by excusable or inexcusable neglect by the defendant. Id. Though courts are not required to, they “may conduct hearings or make referrals” when such actions are helpful in determining whether to enter, and how to effectuate, judgment. Fed.R.Civ.P. 55(b)(2). See Ford Motor Co. v. Cross, 441 F.Supp.2d 837, 848 (E.D. Mich. 2006) (“Fed. R. Civ. P. 55 does not require a presentation of evidence as a prerequisite to the entry of a default judgment, although it empowers the court to conduct such hearings as it deems necessary and proper to enable it to enter judgment or carry it into effect.”).

         Where a defendant has failed to answer or to otherwise respond to the complaint and the Clerk of Court has entered default, “the Court must accept all well pleaded factual allegations in the . . . complaint relating to defendant . . . as true.” Grange Ins. Co. of Mich. v. Parrish, No. 13-11822, 2014 WL 12662275, *1 (E.D. Mich. May 30, 2014) (citing Stooksbury v. Ross, 528 Fed.Appx. 547, 551 (6th Cir. 2013)). See Trustees of Roofers Local 19 Sec. Benefit Tr. Fund v. Traverse Bay Roofing Co., No. 16-13091, 2017 WL 1021066, *1 (E.D. Mich. Mar. 16, 2017). “[W]ell-pleaded factual allegations are sufficient to establish a defendants' liability” in connection with a default judgment motion. Nat'l Satellite Sports, Inc. v. Mosley Entm't, Inc., No. 01-CV-74510-DT, 2002 WL 1303039, *3 (E.D. Mich. May 21, 2002). Additionally, judgment by default may be entered without a hearing on damages where the amount claimed is “capable of ascertainment from the definite figures contained in the documentary evidence or in detailed affidavits.” Commodity Futures Trading Com'nn v. Marquis Fin. Mgmt. Syst., Inc., No. 03-74206, 2005 WL 3752233, *2 (June 8, 2005). Here, because Defendant has failed to plead or defend and the Clerk has entered default against him, the Court will accept as true the factual allegations contained in the Complaint and determine whether they entitle the SEC to default judgment on its asserted claims.

         A. Sections 17(a) of the Securities Act

         Section 17(a) of the Securities Act makes it unlawful for any person, directly or indirectly in the ...

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