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finding default to be willful where individual defendants ignored order to inform court if they would retain new counsel or proceed pro se
Summary of this case from RL 900 Park LLC v. EnderOpinion
No. 00 Civ. 7290 (LTS)(HBP).
June 28, 2004
SECURITIES AND EXCHANGE COMMISSION, By: Charles D. Stodghill, Esq., Charles J. Felker, Esq., Kimble C. Cannon, Esq., Washington, D.C., Attorneys for Plaintiff.
CONSTANTINE SPYROPOULOS, Athens, Greece, Defendant Pro Se.
JACOBUS J. LAM, Multibreen B.V., NETHERLANDS, Defendant Pro Se.
OPINION
This matter, in which Plaintiff Securities and Exchange Commission ("SEC") seeks injunctive and monetary relief in connection with alleged insider trading, comes before the Court on the SEC's contested motions for default judgments against Defendant Constantine Spyropoulos ("Spyropoulos") and Defendants Jacobus J. Lam, Potenza Investments, Inc., Westcliff Partners, and Quintillion, B.V. ("Lam Defendants") pursuant to Rule 55(b) of the Federal Rules of Civil Procedure. Spyropoulos failed to comply with the Court's May 16, 2003, Order setting aside his previous default in this matter, and requiring him to serve and file a response to the Complaint within thirty days of the date of the Order. The Lam Defendants failed to comply with the Court's April 15, 2003, Order granting the application of Jones, Day, Reavis Pogue ("Jones Day") to withdraw as counsel for the Lam Defendants, which Order directed each of the Lam Defendants to cause a notice of appearance to be served and filed by new counsel (except in the case of individual Defendant Jacobus J. Lam, who was advised that he could appear pro se) within sixty days of the date of the Order.
The SEC seeks a permanent injunction restraining Spyropoulos from committing future violations of the federal securities laws, and a judgment requiring Spyropoulos to disgorge his alleged illegal trading profits in the amount of $114,150, as well as pay prejudgment interest in the amount of $107,434.93 and a civil monetary penalty of $342,450 (three times the profit gained from the allegedly illegal trade of securities). As to the Lam Defendants, the SEC seeks a judgment granting a permanent injunction restraining them from committing future violations of the federal securities laws, and requiring the Lam Defendants to pay a civil monetary penalty of up to three times the total allegedly illegal trading profit made by each of the Lam Defendants.
The Court has considered thoroughly all of the parties' submissions related to the instant motions. For the following reasons, Plaintiff's motions are granted. Spyropoulos and the Lam Defendants will be permanently enjoined from committing future violations of the federal securities laws. The Court will defer determinations as to monetary relief pending an opportunity for Spyropoulos and the Lam Defendants to make further submissions in response to the evidence proffered by the SEC in support of its claims for disgorgement, interest and penalties.
BACKGROUND
The factual background of this case was more comprehensively detailed in the Court's Opinion and Order, dated August 14, 2001, denying, in part, and granting, in part. Defendants' motion to dismiss the complaint. Familiarity with that opinion is assumed.
The SEC filed the instant action on September 27, 2000, asserting claims for disgorgement, penalties and injunctive relief against multiple defendants, including Spyropoulos, Spyropoulos's wife Penelope Afouxenide ("Afouxenide") and the Lam Defendants, based upon allegations of unlawful insider trading of securities in violation of Section 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act") ( 15 U.S.C.A. § 78j(b) (West 2004)), and Rule 10b-5 ( 17 C.F.R. § 240.10b-5 (2002)) promulgated thereunder, and Section 14(e) of the Exchange Act ( 15 U.S.C. § 78n(e) (West 1997)) and Rule 14e-3 ( 17 C.F.R. § 240.14e-3 (2002) promulgated thereunder.
Spyropoulos
Spyropoulos, who resides in Greece, is a citizen of both Greece and the United States. (Declaration of Charles Stodghill, dated September 29, 2003 ("9/29/03 Stodghill Decl.") ¶¶ 2, 3; Exs. 1, 2 at 27; Spyropoulos Aff. in Supp. of Motion for Order Setting Aside Entry of Default at ¶ 1.) Spyropoulos is a well-educated international businessman who holds a Bachelors Degree in Mechanical Engineering from NYU, a Masters Degree in Applied Mechanics from California Institute of Technology and a Masters in Business Administration from UCLA. (9/29/03 Stodghill Decl. ¶ 3; Ex. 2 at 4-5; 9/29/03 Stodghill Decl. ¶ 5; Ex. 4 at 28-29.)
The SEC alleges that Defendant Susi Belli ("Belli"), a former employee of Luxottica S.p.A. ("Luxottica"), passed material nonpublic information concerning Luxottica's plans to acquire U.S. Shoe Corporation ("U.S. Shoe") to Defendant Adrian Alexander ("Alexander"), who, in turn, shared this information with a number of friends and/or associates, including Spyropoulos. The SEC further alleges that Spyropoulos used the information to make illegal purchases of U.S. Shoe securities prior to Luxottica's public announcement of its hostile tender offer for U.S. Shoe.
On December 22, 2000, the SEC served Spyropoulos and Afouxenide with copies of the Summons and Complaint in accordance with Greek law by causing a bailiff to post said documents on the front door of their residence. (9/29/03 Stodghill Decl. ¶ 6, Ex. 5.) Spyropoulos failed to timely respond to the Complaint. On August 8, 2001, the SEC requested permission from the Court to file a motion for a default judgment. On that same day, the Court issued an Order granting the SEC's request, which was served upon Spyropoulos and Afouxenide on or about September 14, 2001. (9/29/03 Stodghill Decl. ¶ 8, Ex. 7.) The SEC, however, did not file a motion for default judgment, and, on August 9, 2002, Spyropoulos and Afouxenide, through their retained counsel, filed a motion for an order setting aside the entry of default against both defendants and dismissing the actions as to Spyropoulos and Afouxenide for lack of personal jurisdiction. By order dated May 16, 2003, the Court granted the motion to set aside the entry of default against both defendants, granted the motion to dismiss as to Afouxenide and denied the motion to dismiss as to Spyropoulos. The Court also directed Spyropoulos to serve and file his response to the Complaint within thirty days of the date of the order.
Spyropoulos did not respond to the Complaint within the time frame prescribed in the Court's May 16th Order, and on July 14, 2003, the SEC again requested the Court's permission to make a motion for a default judgment as to Spyropoulos. The Court issued an order granting the SEC's request on July 22, 2003, and directing the SEC to serve the order on Spyropoulos's counsel. Although a certificate of service is not listed on the court docket, Plaintiff has proffered evidence that the order was served on Spyropoulos's counsel as of July 31, 2003, and that an attempt was made to file a certificate of service. On July 23, 2003, Spyropoulos's counsel, the Law Offices of Bradley D. Simon, moved to withdraw, citing increasing difficulties in communication between the firm and Spyropoulos, proffering a copy of a letter from Spyropoulos discharging the firm and indicating that Spyropoulos had insufficient funds to continue paying a law firm and, therefore, intended to proceed pro se from that point forward. On August 12, 2003, the Court issued an order permitting the Law Office of Bradley D. Simon to withdraw following its filing of a certificate of service of the order on Spyropoulos and all counsel of record in this case, and directing Spyropoulos to file a notice of appearance either pro se or by new counsel within 45 days of the date of the order. The Law Offices of Bradley D. Simon did not file the Certificate of Service until October 9, 2003, indicating that they had mailed the order to Spyropoulos on October 3, 2003. The SEC filed the instant motion seeking a default judgment as to Spyropoulos, including a Certificate of Service, on September 30, 2003.
The Lam Defendants
Jacobus J. Lam ("Lam") is a Dutch national residing in the Netherlands. (Declaration of Charles Stodghill, dated October 15, 2003 ("10/15/03 Stodghill Decl.") ¶ 2, Ex. 1.) Lam is a chartered accountant, and served as the Managing Director of Defendant Quintillion B.V., a Dutch corporation, an officer of Defendant Potenza Investments, Inc., a Panamian corporation based in the Netherlands, and the President of Defendant Westcliff Partners, a Dutch corporation. (Id.)
The SEC alleges that Alexander, either on his own or through Patrick J. Rooney ("Rooney"), disseminated the inside information he received from Belli to Lam, who, in turn, acting through accounts in the names of the aforementioned companies, used the information to make illegal purchases of U.S. Shoe securities before the public announcement of Luxottica's hostile tender offer for U.S. Shoe.
The Lam Defendants answered the SEC's Complaint on March 15, 2001. On September 5, 2002, Jones Day, the attorneys of record for the Lam Defendants, filed a motion for an order permitting them to withdraw as counsel for the Lam Defendants based upon the Lam Defendants' alleged failure and refusal to communicate and cooperate despite repeated attempts by Jones Day over the course of a year "to discuss matters such as settlement, strategy, the clients' objectives, the need to respond to discovery and the need to schedule and appear at proposed depositions." (Aff. of Lee A. Armstrong at ¶ 4.) The Court issued an order granting Jones Day's motion to withdraw on April 15, 2003. In that order, the Court directed each of the Lam Defendants to cause a notice of appearance to be filed by new counsel, or, in the case of Lam, either by new counsel or pro se, within 60 days of the date of the order. The order also warned that failure to comply could result in the Court entering a default judgment. The order further directed Jones Day to serve copies of the order upon the Lam Defendants within five days of the date of the order. Jones Day filed an affidavit of service on April 16, 2003, indicating that the order was served on the Lam Defendants by fax and Federal Express on that same date. None of the Lam Defendants filed a notice of appearance in a timely fashion, and the SEC requested permission to file a motion for a default judgment via letter to the Court, dated July 10, 2003, and copied to the Lam Defendants. (10/15/03 Stodghill Decl. ¶ 6, Ex. 5.) The Court issued an order granting the SEC permission to move for a default judgment on July 22, 2003, which the SEC served on the Lam Defendants via Federal Express on July 31, 2003. (Id. at ¶ 7, Ex. 6.) The SEC filed the instant motion seeking a default judgment against the Lam Defendants on October 15, 2003.
DISCUSSION
Opposition to a motion for a default judgment is evaluated under the same "good cause shown" standard that is used to evaluate motions to set aside an entry of default pursuant to Fed.R.Civ.P. 55(c). Commerical Bank of Kuwait v. Rafidain Bank, 15 F.3d 238, 243 (2d Cir. 1994). Courts evaluate whether "good cause" exists to deny the motion by considering the following factors: 1) whether the default was willful; 2) whether the defendant has presented any meritorious defenses to the plaintiff's claims; and 3) whether, and to what extent, the non-defaulting party would be prejudiced by the denial of the motion for a default judgment Id. American Alliance Ins. Co., Ltd. v. Eagle Ins. Co., 92 F.3d 57, 59 (2d Cir. 1996); SEC v. McNulty, 137 F.3d 732, 738 (2d Cir. 1998). Dispositions of motions for default judgments are "left to the sound discretion of the district court." Shah v. New York State Dep't of Civil Service, 168 F.3d 610, 615 (2d Cir. 1999) (internal quotation marks and citation omitted.)
The Second Circuit has determined that "[s]trong public policy favors resolving disputes on the merits" rather than through default judgments. American Alliance, 62 F.3d at 61; Shah, 168 F.3d at 615. "[B]ecause defaults are generally disfavored and are reserved for rare occasions, when doubt exists as to whether a default should be granted or vacated, the doubt should be resolved in favor of the defaulting party." Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 96 (2d Cir. 1993). "A default judgment is by its nature an extreme sanction, and `such extreme measures should be reserved by a trial court as a final, not a first, sanction imposed on a litigant.'" Tellock v. Davis, No. 02 CV 4311 (FB), 2003 WL 22999199, at * 1 (S.D.N.Y Dec. 17, 2003) (quoting Enron Oil Corp., 10 F.3d at 92)). That said, "courts also have a competing `interest in expediting litigation' and consequently in preventing `abuses of process . . . by enforcing those defaults that arise from egregious or deliberate conduct.'"U.S. v. Manhattan Central Capital Corp., No. 94 CIV 5573(WK), 2001 WL 902573, at *4 (S.D.N.Y. July 26, 2001) (quoting Pecarsky v. Galaxiworld.com Ltd., 249 F.3d 167, 172 (2d Cir. 2001)).
Spyropoulos
As detailed above, the SEC's motion for a default judgment against Spyropoulos is predicated primarily on the fact that Spyropoulos did not respond to the SEC's Complaint in a timely fashion. The SEC filed the Complaint in the instant action on September 27, 2000, and served copies of the Summons and Complaint on Spyropoulos on December 22, 2000. When Spyropoulos failed to respond, the Court issued an order, on August 8, 2001, granting the SEC permission to file a motion for a default judgment. A copy of the order was served on Spyropoulos on or about September 14, 2001. Spyropoulos then, through counsel, filed a motion on August 9, 2002, to have the default set aside and the action dismissed for lack of personal jurisdiction. On May 16, 2003, the Court denied the motion to dismiss as to Spyropoulos, but granted the motion to set aside the default, allowing Spyropoulos another thirty days from the date of the order to respond to the Complaint. Once again, Spyropoulos failed to respond in a timely fashion. The SEC also contends that Spyropoulos has not participated in any discovery, and failed to make himself available for a deposition, despite multiple requests, until after the close of discovery. Finally, the SEC also points out that Spyropoulos did not file opposition to the instant motion for a default judgment, which was filed on September 30, 2003, along with a Certificate of Service, in a timely fashion.
Spyropoulos's opposition to the SEC's motion for a default judgment is in the form of three letters that he sent personally to the Court and counsel. In the first letter, dated December 10, 2003, which was fashioned as both a response to the SEC's December 3, 2003, letter requesting an adjournment of a scheduled pre-trial conference and as a response to the SEC's motion for a default judgment, Spyropoulos asserts that he already answered the Complaint, and that "more recently" he also filed the motion to dismiss which was granted as to his wife. Spyropoulos also contends, without offering any details, that he participated in discovery.
Spyropoulos sent a second letter to the Court and counsel, dated December 11, 2003. In the second letter, Spyropoulos asserts that he just learned, contrary to his instructions and expectations given that he had provided his attorneys with all the necessary information, that his attorneys had never filed an answer to the Complaint. He also denied the allegations in the Complaint and requested permission to represent himself pro se and file an answer within 30 days.
Spyropoulos then sent a third letter, dated January 15, 2004, reiterating his request for additional time to file an answer, and, in the alternative, denying all allegations against him in the Complaint and requesting that the letter be accepted in lieu of an answer. Spyropoulos also argued that the SEC would not suffer any prejudice if its motion for a default judgment was denied.
Willfulness
In the context of a motion for a default judgment, courts have interpreted "`willfulness' to refer to conduct that is more than merely negligent or careless." McNulty, 137 F.3d at 738. "On the other hand, the court may find a default to have been willful where the conduct of counsel or the litigant was egregious and was not satisfactorily explained." Id. A default may also be considered willful when the conduct involved is "deliberate." American Allied, 92 F.3d at 61. For example, conduct will be considered willful "when the defaulting party intended to ignore the action or the authority of the court."Gravatt v. City of New York, No. 97 Civ. 0354(RWS), 1997 WL 419955, at *3 (S.D.N.Y. July 28, 1997). In addition, default judgments are properly entered when a defendant has made a decision to default for strategic reasons or to gain a tactical advantage, or when "a litigant is confronted with an obstructionist adversary." Id. "`Courts have held a default to be willful when a defendant knew about the complaint and failed to respond . . . where the defendant fails to comply with the court's orders . . . [or] when a lawyer neglects a case for an extended period of time.'" Gumbs Thomas Publishers, Inc. v. Lushena Books, No. 99 CV 3608 (ILG), 2003 WL 21056983, at *2 (E.D.N.Y. Mar. 3, 2003) (quoting Saifullah v. U.S. Parole Com'n, No. 90 CV 1961, 1991 WL 58280, at *1 (E.D.N.Y. Apr. 5, 1991)).
Spyropoulos is a well-educated, sophisticated businessman who failed to timely respond to the Complaint when it was first served on him. After having the initial entry of default set aside, he was clearly on notice of and failed to comply with the Court's May 16, 2003, Order directing him to respond to the Complaint within 30 days. Spyropoulos claims in his December 11, 2003, letter requesting more time to file and serve an answer, that he only just discovered that his lawyers had not responded to the Complaint. However, the SEC has proffered evidence that its July 14, 2003, letter requesting the Court's permission to move for a default judgment, the Court's July 22, 2003, order granting such permission, the Clerk's Certificate of Default, dated September 12, 2003, and the SEC's papers relating to the instant motion, all of which indicate that a response to the Complaint had not been timely filed, were all served on Spyropoulos months before his purported discovery that his answer had not been filed. Spyropoulos makes no claim that he failed to receive any of these documents. Spyropoulos, thus, clearly was on notice that a response to the Complaint had not been filed on his behalf. Despite this, he did nothing until December to try to rectify the situation.
Further belying Spyropoulos's contention that he has cooperated fully in this action are the assertions made by Spyropoulos's former counsel, Kenneth C. Murphy of the Law Offices of Bradley D. Simon, in his declaration, dated July 23, 2003, in support of his firm's motion to withdraw as counsel to Spyropoulos. Murphy cited increasing difficulties in communicating with Spyropoulos, noting that Spyropoulos often failed to answer his phone, and lacked an answering machine or an operable fax machine. Murphy also stated that Spyropoulos had sent him a letter on June 26, 2003, discharging the firm, refusing to pay for services already rendered and indicating that he no longer had funds to pay the Simon firm or any other law firm, and that he intended to proceedpro se. Spyropoulos has offered no evidence to refute these allegations, or the SEC's contention that he has not participated at all in the discovery process.
Hence, the Court concludes that Spyropoulos's conduct in failing to comply with the Court's May 16, 2003, Order and failing to meaningfully participate in the discovery process, particularly after he had already been given a second chance when his initial default was set aside, was egregious and not satisfactorily explained. Therefore, the Court finds that his default was, indeed, willful.
Meritorious Defenses
To make a satisfactory showing of a meritorious defense, "the defense need not be ultimately persuasive at this stage."American Alliance, 92 F.3d at 61. "A defense is meritorious if it is good at law so as to give the factfinder some determination to make." Id. (internal quotation marks and citation omitted). A defendant must, however, "present evidence of facts that, `if proven at trial, would constitute a complete defense,'" McNulty, 137 F.3d at 740 (quoting David v. Musler, 713 F.2d 907, 916 (2d Cir. 1983)). General denials must be supported with some underlying facts. Am. Stevedoring, Inc. v. Banana Distribs., Inc., No. 98 Civ. 5782(BSJ), 1999 WL 731425, at *3 (S.D.N.Y Sept. 20, 1999).
In his letters, Spyropoulos addresses the allegations in the Complaint only with general denials, failing to proffer any facts or evidence to refute the allegations. Hence, the Court concludes that Spyropoulos has failed to assert a meritorious defense.
Prejudice
"Delay alone is not a sufficient basis for establishing prejudice." David, 713 F.2d at 916. "Rather, it must be shown that delay will result in the loss of evidence, create increased difficulties of discovery, or provide greater opportunity for fraud and collusion." Id. (internal quotations marks and citation omitted).
Here, the Complaint and Summons were served on Spyropoulos on December 22, 2000, and Spyropoulos has presented no evidence to counter the SEC's assertions that he has failed to participate in any meaningful way in the discovery process. The SEC has proffered evidence that despite multiple requests, Defendant would not make himself available for a deposition until after the conclusion of the discovery period. The discovery period is now over and the final pre-trial conference in this case is presently scheduled for June 29, 2004. While it is difficult to measure with precision the extent of the prejudice to Plaintiff that would arise from denying the instant motion, the Court finds that the SEC would be prejudiced at least to some extent, given that the case has already been delayed extensively (the Complaint was originally served on Spyropoulos almost 3½ years ago), and that allowing Spyropoulos to continue to defend would cause substantial further delay in concluding the case as to Spyropoulos and the other remaining defendants. In addition, the SEC would be forced to devote even more time and energy to trying to secure discovery from Spyropoulos after having already made extensive efforts to get Spyropoulos to engage in discovery while the discovery period was open.
SEC's Proffered Evidence
The SEC has proffered ample admissible evidence, in the form of deposition transcripts, affidavits, telephone records, brokerage account statements and other exhibits, of such facts that it would have proffered to meet its burden of proof on its direct case had a trial been held in this action with respect to Defendant Spyropoulos.
Weighing the Factors
The Court, having considered thoroughly all of the relevant factors, finds that the SEC's motion for a judgment of default as against Spyropoulos should be granted. All three factors militate toward granting the motion. The SEC's motion for a default judgment as to Defendant Spyropoulos therefore is granted. Accordingly, Spyropoulos's request for an extension of time to submit an answer or, in the alternative, for his January 15, 2004, letter to be accepted as an answer, is denied.
Lam Defendants
As noted above, the SEC's motion for a default judgment against the Lam Defendants, who filed an answer in this case in March 2001, is predicated on the Lam Defendants' failure to comply with the Court's April 15, 2003, Order granting the motion of the Lam Defendants' counsel, Jones Day, to withdraw, and directing each of the Lam Defendants to file a notice of appearance through new counsel or, in the case of Jacobus J. Lam, either through counsel or pro se, within sixty days. A certificate of service of the Order was filed on April 16, 2003. There is no indication that the Lam Defendants failed to receive timely notice of this Order, and none of the Lam Defendants has filed a notice of appearance.
On October 27, 2003, following the SEC's commencement of the instant motion practice, Lam sent a letter to this Court. The letter, which was signed by Lam on behalf of himself and the other Lam Defendants, asserted that the Lam Defendants had sent the Court an earlier letter, dated July 14, 2003, requesting further instructions on how to proceed because of their unfamiliarity with the American legal process. The Court has no record of receiving such a letter. In the October 27th letter, Lam further argued that the SEC's settlement of its claims against Patrick J. Rooney disposed of all the SEC's claims as to the Lam Defendants. The October 27th letter was accompanied by an October 24, 2003, "affidavit" from Rooney, asserting that his settlement with the SEC covered "all amounts plus penalties of alleged insider trading profits . . . which were made through accounts domiciled with Jac Lam of Leiderdorp, the Netherlands", and further asserting that Rooney "did not give Jac Lam any information on any possible tender offer of U.S. Shoe by Luxxotica" prior to " the first trade which resulted in the SEC alleging insider trading violations." (Emphasis supplied.) The SEC charges that there were several offending trades by the Lam-related entities. In response to Plaintiff's reply memorandum, Defendant Lam, on behalf of himself and the other Lam Defendants, sent another letter, dated November 13, 2003, reiterating the contentions advanced in the October 27th letter. Willfulness
As part of the settlement, Rooney agreed to pay some of the relief sought in the Complaint against other defendants, including disgorgement of the Lam Defendants' trading profits.
The Court is unpersuaded by the Lam Defendants' proffered explanations as to why they did not comply with the April 15, 2003, Order and proceed with their defense in a timely and appropriate fashion. The April 15, 2003, Order, which was captioned "THIS IS AN IMPORTANT LEGAL DOCUMENT," specifically instructed the Lam Defendants to appear by new counsel (or pro se, in Lam's individual case) within 60 days from the date of the order "if [the Lam] Defendants intend[ed] to continue to contest the Securities and Exchange Commission's claims in this case" and provided Lam with clear direction as to how to contact the Pro Se Office for instructions if he wished to conduct his individual defense without benefit of counsel. The April 15, 2003, Order also included an admonition that the Court might enter a default judgment against any Defendant who failed to timely enter a notice of appearance.
Lam now asserts that the Lam Defendants' failure to comply with the order should be excused because he chose instead to write to the chambers of the undersigned to request instructions, out of confusion. Even if the July 14, 2003, letter had been received, it would have been an untimely and, in any event, inappropriate response to the Court's specific direction to the business entities to appear by new counsel and to Lam to deal with thePro Se Office directly if he wished to appear pro se. Thus, the Lam Defendants' implicit contention that they were unable to file timely notices of appearances because they were not instructed on how to proceed is untenable.
With regard to the Lam Defendants' contention that the Rooney settlement disposed of all the claims against the Lam Defendants, the SEC concedes that Rooney did disgorge the profits that the SEC originally sought to recoup from the Lam Defendants. In its papers relating to its motion for a default judgment, the SEC makes clear that it no longer seeks disgorgement with respect to the Lam Defendants. At this point, the SEC seeks only an injunction preventing each of the Lam Defendants from committing future violations of the federal securities laws and statutory penalties against each of the Lam Defendants. The SEC's settlement with Rooney in no way precludes the SEC from seeking such relief as against the Lam Defendants. Further, the Rooney settlement was not entered into until January 15, 2004, some seven months after the conclusion of the sixty day period for filing notices of appearance. Thus, to the extent that the Lam Defendants contend that their mistaken belief that the Rooney settlement disposed of all the claims against them was sufficient reason for their failure to comply with the Court's order, such position lacks merit.
Lam's contention that the Lam Defendants' understanding of the American legal system was insufficient for them to proceed in a timely fashion is also inconsistent with the record. The Lam Defendants were sophisticated enough to hire Jones Day at the outset of this litigation, and they offer no explanation, in light of that fact, as to why they did not have the knowledge or wherewithal to hire new lawyers in a timely fashion after Jones Day was permitted to withdraw. Moreover, as noted above, the affidavit submitted by Jones Day in support of its motion to withdraw, which the Lam Defendants did not contest, asserts that the Lam Defendants failed to cooperate with their attorneys despite repeated attempts by those attorneys for more than a year to contact them to discuss various matters pertinent to their defense. This evidence suggests that the Lam Defendants had abandoned any active involvement in their defense long before the Court's April 15, 2003, Order.
The Court concludes, therefore, that the Lam Defendants' default was deliberate, egregious and not satisfactorily explained. The Court thus finds that the Lam Defendants' default was willful.
Meritorious Defenses
As noted above, Lam's October 27, 2003, letter opposing the default judgment motions is accompanied by an "affidavit" signed by Patrick Rooney, in which Rooney states that he did not give Lam any information on a possible tender offer for U.S. Shoe by Luxottica "prior to the first trade which resulted in the SEC alleging insider trading violations" against Defendants. The Complaint alleges that Alexander and Rooney, either individually or together, tipped Lam off to the inside information conveyed to Alexander by Belli regarding Luxottica's plans to acquire U.S. Shoe. The party opposing the default application must present evidence that, if accepted as credible, would support a complete defense to the claims.McNulty, 137 F.3d at 740 (quoting David v. Musler, 713 F.2d 907, 916 (2d Cir. 1983)). The Rooney "affidavit" falls far short of this standard. Even if the jury were to accept that Rooney did not inform the Lam Defendants of the acquisition plans prior to the first of the allegedly unlawful transactions, it does not negate receipt of insider information from Alexander (who, according to evidence proffered by the SEC, spoke with Lam on at least four occasions prior to Quintillion's first purchase of options) and does not address in any way the Lam Defendants' access to information in connection with other purchases. Lam has made no other evidentiary proffer in connection with his opposition to the SEC's default judgment motion. Accordingly, Lam and his co-defendants have failed to proffer a meritorious defense. Prejudice
The unsworn document is addressed to Lam and purportedly "witnessed" by a Toronto barrister.
The SEC contends that it would be prejudiced if the Court denies its motion for a default judgment as to the Lam Defendants because the fact that the Lam Defendants have not filed notices of appearance has prevented the SEC from obtaining important discovery aimed at testing the affirmative defenses raised by the Lam Defendants in their Answer. The SEC argues that allowing the Lam Defendants to appear at trial to raise these defenses without having participated in discovery would be severely prejudicial.
The Court agrees that denying the motion would result in prejudice to the SEC. Permitting the Lam Defendants to go to trial without having participated in discovery would certainly prejudice the SEC. The alternative of reopening discovery would also result in some prejudice. The Court notes in this connection that the Lam-related entities have to date failed to comply in any way with the Court's April 15, 2003, direction that they appear by new counsel. See Jones v. Niagara Frontier Transp. Authority, 722 F.2d 20, 22 (2d Cir. 1983) (corporations are required by 28 U.S.C. § 1654 to appear through counsel). Thus, permitting them to seek to mount a defense at this late date would necessitate delays inherent in the retention and preparation of counsel. The Lam Defendants have proffered no evidence or arguments warranting the further delay of these already-convoluted proceedings.
SEC's Proffered Evidence
The SEC has proffered ample admissible evidence, in the form of deposition transcripts, travel records, affidavits, telephone records, brokerage account statements and other exhibits, supporting its claims against the Lam Defendants. Weighing the Factors
As noted above, determining whether to grant an opposed motion for a default judgment requires a reconciliation of two competing interests. While a strong preference exists for resolving disputes on the merits rather than by default, the efficient administration of the judicial system requires a mechanism for dealing with those who do not meet their litigation-related obligations in a timely manner. The Court, having considered carefully all of the relevant factors, finds that all three factors weigh in favor of granting the SEC's motion as to the Lam Defendants. Thus, the SEC's motion for a default judgment as to the Lam Defendants is granted. Accordingly, the Lam Defendants' requests for dismissal of the SEC's claims against them and for attorneys' fees and damages are denied.
Relief
The SEC seeks a permanent injunction against future violations of the federal securities laws, disgorgement of illegal trading profits plus prejudgment interest, and payment of the maximum civil monetary penalty as to Spyropoulos. With regard to the Lam Defendants, the SEC seeks a permanent injunction against future violations of the federal securities laws and payment of the maximum civil monetary penalty.
The Court has the authority to issue a permanent injunction restraining future violations of the securities laws pursuant to 15 U.S.C.A. § 78u(d) (West 2004). "Injunctive relief is appropriate when there is a `realistic likelihood of recurrence' of the violations." SEC v. Softpoint, Inc., 958 F. Supp. 846, 867 (S.D.N.Y. 1997) (quoting SEC v. Commonwealth Chem. Secs., Inc., 574 F.2d 90, 99-100 (2d Cir. 1978)). Several factors are to considered in determining the probability of future violations: "(1) the degree of scienter involved, (2) the isolated or recurring nature of the fraudulent activity, (3) the defendant's appreciation of his wrongdoing, and (4) the defendant's opportunities to commit future violations." Softpoint, 958 F. Supp. at 867. The Court has considered thoroughly all of the above-described factors as they relate to Spyropoulos and the Lam Defendants, and concludes that there is a realistic likelihood that the infractions committed by both Spyropoulos and the Lam Defendants would recur.
As to Spyropoulos, the record shows a high degree of scienter. Spyropoulos is a sophisticated businessman who, in 1983, was previously convicted of violating the securities laws for his participation in a similar scheme which involved insider trading arising from a tip Alexander provided him regarding a corporate takeover bid. The fact that Spryropoulos engaged in similar fraudulent conduct subsequent to his conviction indicates both a lack of appreciation for his wrongs as well as a likelihood that he might engage in similar activity in the future. Further, his conduct with respect to the instant action was not limited to a single incident but instead involved a number of beneficially-timed transactions which took place over the span of a little over two weeks. As to the fourth factor, Spyropoulos has already demonstrated an ability repeatedly to engage in the type of fraudulent conduct complained of in this action and there is no reason for the Court to conclude that he would not be in a position to commit further violations in the future.
As to the Lam Defendants, Lam is a chartered accountant and a sophisticated investor who conspired with others in a complex scheme involving various international corporate entities (the other Lam Defendants) to violate the securities laws. Lam's sophistication, as well as the complicated and multi-faceted nature of the scheme to defraud, in which the corporate entities were presumably used in an effort to conceal the identities of the individuals involved in the insider trading scheme, indicate a high degree of scienter. In addition, the Lam Defendants have failed to demonstrate an appreciation for their wrongdoing. Finally, by virtue of his status as an accountant, Lam, and by extension the Lam corporate defendants to which Lam is closely connected, would have the opportunity to commit further violations in the future.
Accordingly, both Spyropoulos and the Lam Defendants are permanently enjoined from committing future violations of the securities laws. The Court will defer decision as to monetary relief with respect to Spyropoulos and the Lam Defendants until Defendants have been afforded an additional opportunity to file and serve papers in opposition to the evidence and arguments proffered by the SEC in connection with the instant motions.
CONCLUSION
For the foregoing reasons, the SEC's default judgment motions as to Spyropoulos and the Lam Defendants are granted. Spyropoulos and the Lam Defendants are permanently enjoined from committing future violations of the federal securities laws. The Court will grant Spyropoulos and the Lam Defendants a further 45 days from the date of this Opinion to file and serve (through counsel orpro se, in the case of Spyropoulos and Lam, and through counsel only, in the case of Potenza Investments, Inc., Westcliff Partners, and Quintillion, B.V.) any further opposition to the SEC's claims for disgorgement, interest and monetary penalties.