United States District Court, E.D. Michigan, Southern Division
ORDER GRANTING MOTION FOR DEFAULT JUDGMENT
TERRENCE G. BERG, UNITED STATES DISTRICT JUDGE
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).
BACKGROUND
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.
DISCUSSION
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 ...