United States Securities and Exchange Commission v. Valentine

[7] 8 UNITED STATES DISTRICT COURT 9 NORTHERN DISTRICT OF CALIFORNIA 10 San Francisco Division 11 SECURITIES AND EXCHANGE Case No. 20-cv-04358-LB COMMISSION [12] Plaintiff, ORDER GRANTING THE 13 PLAINTIFF’S MOTION FOR v. DEFAULT JUDGMENT [14] JOHN LEO VALENTINE, Re: ECF No. 19 [15] Defendant. [16] 17 INTRODUCTION 18 In administrative proceedings before the United States Securities and Exchange Commission, 19 the defendant John Valentine — an investment adviser — consented on October 20, 2016 to the 20 entry of a cease-and-desist order (the “Commission Order”) that included a bar from the securities 21 industry for two years and a civil monetary penalty of $140,000 plus interest. He never made any 22 payments. The Commission sued to enforce the Commission Order under Section 15(b) of the 23 Securities and Exchange Act of 1940 and Section 209(d) of the Investment Advisers Act of 1940.1 24 Both parties consented to magistrate-judge jurisdiction, Mr. Valentine waived service, and he did 25 not thereafter answer the complaint or otherwise defend the action.2 At the Commission’s request, [27] 1 Compl. – ECF No. 1. Citations refer to material in the Electronic Case File (“ECF”); pinpoint citations are to the ECF-generated page numbers at the top of documents. 1 the Clerk of the Court entered default against Mr. Valentine, and the Commission moved for 2 default judgment.3 The court grants the motion and enters default judgment in the form proposed 3 by the Commission. 4 STATEMENT 5 The Commission Order found that Mr. Valentine — the founder and former president of a 6 former registered-investment-adviser firm called Valentine Capital Asset Management — failed to 7 disclose a financial conflict of interest to his clients when he made an investment recommendation 8 to them. In short, he had a personal financial incentive to make the recommendation. He also 9 misled them by telling them that he had terminated Valentine Capital’s prior custodian when in 10 fact, the custodian terminated the relationship in part due to its concern about the Commission’s 11 enforcement action against Mr. Valentine.4 12 The Commission instituted the cease-and-desist proceedings against Mr. Valentine under 13 Section 15(b) of the Exchange Act and Sections 203(f) and 203(k) of the Advisers Act. In 14 anticipation of those proceedings, Mr. Valentine submitted an offer of settlement, which the 15 Commission accepted. In the offer of settlement, he consented to the entry of the Commission 16 Order — providing for a $140,000 civil penalty, interest under 31 U.S.C. § 3717 , and a two-year 17 bar from the securities industry with a right to reapply — without admitting or denying its 18 findings. The Commission issued the Commission Order on October 20, 2016.5 Mr. Valentine did 19 not seek review of the Commission Order, and the time to do so has expired. Mr. Valentine did not 20 make any payments.6 21 The Commission then filed this lawsuit to enforce the Commission Order.7 Mr. Valentine 22 executed a waiver of service, and his answer was due on November 19, 2020.8 Both parties [24] 3 Entry of Default – ECF No. 18; Mot. – ECF No. 19. 25 4 Compl. – ECF No. 1 at 4 (¶¶ 8–10). [5] Id. (¶¶ 11–15). [6] Id. at 3–4 (¶¶ 1–15); Schultze Decl. – ECF No. 19-2 at 2 (¶¶ 5–6). [27] 7 Compl. – ECF No. 1. 1 consented to magistrate-judge jurisdiction.9 Mr. Valentine did not answer the complaint. At the 2 Commission’s request, the Clerk of Court entered Mr. Valentine’s default on December 1, 2020.10 3 The Commission moved for default judgment and served Mr. Valentine.11 The court held a 4 hearing on January 14, 2021. Mr. Valentine did not appear. [5] 6 ANALYSIS 7 1. Jurisdiction and Adequacy of Service 8 Before entering default judgment, a court must determine whether it has subject-matter 9 jurisdiction over the action and personal jurisdiction over the defendant. In re Tuli, 172 F.3d 707 , 10 712 (9th Cir. 1999). A court must also ensure the adequacy of service on the defendant. Timbuktu 11 Educ. v. Alkaraween Islamic Bookstore, No. C 06–03025 JSW, 2007 WL 1544790 , at *2 (N.D. 12 Cal. May 25, 2007). 13 The court has jurisdiction under Sections 21(e)(1) and 27(a) of the Exchange Act, 15 U.S.C. 14 §§ 78u(e)(1) and 78aa(a), and Section 209(d) of the Advisers Act, 15 U.S.C. §§ 80b-1–80b-21, 15 and Section 42(d) of the Investment Company Act, 15 U.S.C. §§ 80a-1–80a-64. Venue is in the 16 Northern District of California under section 214(a) of the Advisers Act, 15 U.S.C. § 80b-1–80b17 21, and Section 44 of the Investment Company Act, 15 U.S.C. § §§ 80a-1–80a-64, because Mr. 18 Valentine is “found” or is an “inhabitant” here. The court has personal jurisdiction because Mr. 19 Valentine lives here.12 He waived service. Fed. R. Civ. P. 4(d)(1), (4). [20] 21 2. Default-Judgment Analysis 22 Under Federal Rule of Civil Procedure 55(b)(2), a plaintiff may apply to the district court for 23 — and the court may grant — a default judgment against a defendant who has failed to plead or [25] 9 Consent Forms – ECF Nos. 6, 9. Mr. Valentine is representing himself. The SEC filed his waiver of 26 service and his consent to magistrate-judge jurisdiction. 10 Mot. – ECF No. 17; Entry of Default – ECF No. 18. [27] 11 Mot. – ECF No. 19; Certificate of Service – ECF No. 19-1. 1 otherwise defend an action. After entry of default, well-pleaded allegations in the complaint 2 regarding liability and entry of default are taken as true, except as to damages. Fair Hous. of 3 Marin v. Combs, 285 F.3d 899, 906 (9th Cir. 2002); TeleVideo Sys., Inc. v. Heidenthal, 826 F.2d 4 915 , 917–18 (9th Cir. 1987). The court need not make detailed findings of fact. Combs, 285 F.3d 5 at 906 . “A default judgment must not differ in kind from, or exceed in amount, what is demanded 6 in the pleadings.” Fed. R. Civ. P. 54(c). 7 “A defendant’s default does not automatically entitle the plaintiff to a court-ordered 8 judgment.” Pepsico, Inc. v. Cal. Sec. Cans, 238 F. Supp. 2d 1172, 1174 (C.D. Cal. 2002). The 9 decision to grant or deny a default judgment lies within the court’s discretion. Draper v. Coombs, [10] 792 F.2d 915 , 924–25 (9th Cir. 1986). 11 In deciding whether to enter a default judgment, the court considers: “(1) the possibility of 12 prejudice to the plaintiff, (2) the merits of the plaintiff’s substantive claim, (3) the sufficiency of 13 the complaint, (4) the sum of money at stake in the action[,] (5) the possibility of a dispute 14 concerning material facts[,] (6) whether the default was due to excusable neglect[,] and (7) the 15 strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits.” 16 Eitel v. McCool, 782 F.2d 1470 , 1471–72 (9th Cir. 1986). “Of all the Eitel factors, courts often 17 consider the second and third factors to be the most important.” Mohanna v. Bank of Am., N.A., 18 No. 16-cv-01033-HSG, 2017 WL 976015 , at *3 (N.D. Cal. Mar. 14, 2017) (internal quotation 19 marks omitted) (citing cases). 20 The Eitel factors favor entry of default judgment against the defaulting defendant. 21 2.1 Possibility of Prejudice to the Plaintiff (First Eitel Factor) 22 The first Eitel factor considers whether the plaintiff will suffer prejudice if default judgment is 23 not entered, and whether such potential prejudice to the plaintiff weighs in favor of granting 24 default judgment. Eitel, 782 F.2d at 1471 ; Craigslist, Inc. v. Naturemarket, Inc., 694 F. Supp. 2d 25 1039 , 1054–55 (N.D. Cal. 2010). This factor weighs in favor of granting default judgment because 26 the Commission has no recourse otherwise. Cf. SEC v. Lowrance, No. 11-cv-03451-EJD, 2012 27 WL 2599127 , at *3 (N.D. Cal. July 5, 2012) (finding prejudice because, where “Defendants have 1 elected not to take part in the litigation, the SEC will be unable to fulfill its mandate to enforce 2 securities laws and to obtain injunctive relief if default judgment is not granted”). 3 2.2 The Merits and Sufficiency of the Claims (Second and Third Eitel Factors) 4 The second and third Eitel factors consider the merits of the claim and the sufficiency of the 5 complaint. Eitel, 782 F.2d at 1471 . “The Ninth Circuit has suggested that [these factors] require 6 that plaintiffs’ allegations ‘state a claim on which the [plaintiffs] may recover.’” Kloepping v. 7 Fireman’s Fund, No. C 94-2684 TEH, 1996 WL 75314 , at *2 (N.D. Cal. Feb. 13, 1996) (quoting 8 Danning v. Lavine, 572 F.2d 1386, 1388 (9th Cir. 1978)). 9 The second and third factors favor granting default judgment. 10 The Commission seeks enforcement of the Commission Order. It has the authority to do so 11 under Section 209(d) of the Advisers Act, 15 U.S.C. § 80b-9(b): 12 Whenever it shall appear to the Commission that any person has engaged, is engaging, or is about to engage in any act or practice constituting a violation of . . . any . . . order 13 hereunder, . . . it may in its discretion bring an action in the proper district court of the United States, . . . to enforce compliance with . . . any . . . order hereunder. [14] 15 Mr. Valentine may not challenge the validity of the order: all that is left to do is to enforce the 16 order. Cf. SEC v. McCarthy, 322 F.3d 650, 658 (9th Cir. 2003) (it would be “redundant” to litigate 17 the substantive issues of an SEC enforcement action in district court; “the time for adjudicating the 18 merits of the claim have been exhausted; all that is left to do is enforce the order.”). 19 2.3 The Sum of Money at Stake (Fourth Eitel Factor) 20 The fourth Eitel factor considers the amount of money at stake in the litigation. Eitel, 782 F.2d 21 at 1471 . Here, the Commission seeks to enforce the Commission Order directing Mr. Valentine to 22 pay a civil money penalty of $140,000 and interest under 31 U.S.C. § 3717 (until the entry of 23 judgment, and injunctive relief.13 This factor weighs in favor of granting default judgment. 24 2.4 Factual Dispute or Excusable Neglect (Fifth and Sixth Eitel Factors) 25 The fifth and sixth Eitel factors consider the potential of factual disputes and whether a 26 defendant’s failure to respond likely was due to excusable neglect. Eitel, 782 F.2d at 1471–72. [27] 1 Here, nothing suggests a factual dispute or excusable neglect: Mr. Valentine consented to the 2 Commission Order, waived service, consented to this court’s jurisdiction, and had notice of all 3 proceedings and an opportunity to object.14 These factors weigh in favor of granting default 4 judgment. 5 2.5 Policy Favoring Decisions on the Merits (Seventh Eitel Factor) 6 The seventh Eitel factor is the strong policy favoring decisions on the merits. Although default 7 judgment is disfavored, “[t]he very fact that F.R.C.P. 55(b) exists shows that this preference, 8 standing alone, is not dispositive.” Kloepping, 1996 WL 75314 at *3. “While the Federal Rules do 9 favor decisions on the merits, they also frequently permit termination of cases before the court 10 reaches the merits[,] . . . [as] when a party fails to defend against an action[.]” Id. Mr. Valentine 11 failed to participate in the lawsuit, and a decision on the merits is impossible. 12 * * * 13 In sum, the Eitel factors weigh in favor of entering default judgment. The next section 14 addresses the scope of relief. [15] 16 3. Relief Sought 17 The plaintiff seeks payment of a civil money penalty of $140,000, outstanding interest, post18 judgment interest, and injunctive relief.15 The Commission already adjudicated the merits of its 19 claims against Mr. Valentine and set the damages and injunctive relief. The Commission Order 20 and the complaint gave notice to Mr. Valentine. The Commission also proved its damages — in 21 the form of Mr. Valentine’s failure to make a payment — through its declaration in support of the 22 default judgment.16 It is entitled to accrued interest under 31 U.S.C. § 3717 (a)(1) through the date 23 of judgment and post-judgment interest thereafter under 28 U.S.C. § 1961 (a). It is entitled to entry 24 of judgment on the injunctive relief in the Commission Order (as set forth in the next section). [26] 14 Waivers of Service – ECF No. 8; ECF No. 12; Certificate of Service – ECF No. 19-1. [27] 15 Compl. – ECF No. 1 at 5–6 (Prayer for Relief). 1 CONCLUSION 2 The court grants the Commission’s motion for default judgment and enters default judgment 3 against the defendant John Leo Valentine as follows. [4] 5 1. Monetary Penalty 6 The defendant must pay a civil monetary penalty of $140,000 plus interest under 31 U.S.C. § 7 3717 through entry of judgment and post-judgment interest under 28 U.S.C.§ 1961. 8 The defendant must make payment in one of the following ways: 9 (1) He may transmit payment electronically to the Commission, which will provide detailed ACH transfer/Fedwire instructions upon request; [10] (2) He may make direct payment from a bank account via Pay.gov through the SEC 11 website at http://www.sec.gov/about/offices/ofm.htm; or (3) He may pay by certified check, bank cashier’s check, or United States postal money [12] order, made payable to the Securities and Exchange Commission and hand-delivered or 13 mailed to: Enterprise Services Center [14] Accounts Receivable Branch 15 HQ Bldg., Room 181, AMZ-341 6500 South MacArthur Boulevard 16 Oklahoma City, OK 73169 17 Payments by check or money order must be accompanied by a cover letter identifying the 18 defendant in this action making the payment, and the name of this Court and the docket number of 19 this action. A copy of the cover letter and check or money order must be sent to Carol E. Schultze, 20 Securities and Exchange Commission, 100 F Street, NE, Mail stop 5628, Washington, DC 2054921 5628 or via email at schultzec@sec.gov [22] 23 2. Injunctive Relief 24 The defendant: 25 (1) must cease and desist from committing or causing any violations and any future violations of Sections 206(2) of the Advisers Act; [26] (2) is barred from association with any broker, dealer, investment advisor, municipal 27 securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization until he has applied and been granted a right of reentry from the 1 (3) is barred from participating in any offering of a penny stock, including: acting as a promotor, finder, consultant, agent or other person who engages in activities with a 2 broker, dealer or issuer for purposes of the issuance or trading in any penny stock, or inducing or attempting to induce the purchase or sale of any penny stock until he has 3 applied for and been granted a right of reentry from the appropriate self-regulatory 4 agency, or if there is none, to the Commission. 5 3. Other Relief 6 The court, subject to the foregoing, may order such relief as may be necessary for enforcement 4 of any order of this court as to the civil monetary penalty pursuant to the Federal Debt Collection 8 Procedures Act, 28 U.S.C § 3001-3308. [9] 10 4. Retention of Jurisdiction ll The court retains jurisdiction to enforce the terms of this judgment. IT IS SO ORDERED. [3] Dated: January 14, 2021 Lp 14 -— LAUREL BEELER 15 United States Magistrate Judge [16] & = 17 Z 18