ROBERT D. MARIANI, District Judge.
Presently before the Court is Plaintiff Securities and Exchange Commission's ("SEC's") Motion for Entry of Default Judgment (Doc. 9). For the reasons discussed below, the Court will grant the SEC's motion.
On April 25, 2017, the SEC filed a Complaint against Defendants Matthew A. Krimm ("Krimm") and his company; Krimm Financial Services, LLC ("KFS") (collectively, "Defendants"), seeking injunctive relief, disgorgement of ill-gotten gains, an award of prejudgment interest, and civil penalties for an alleged mortgage business investment scam. (Doc. 1). Defendants waived service of the Complaint. (Doc. 3, Doc. 4). Defendants never responded to the Complaint, and the SEC moved on September 7, 2017 for the Clerk of Court's entry of default, which was entered that same day. (Doc. 5, Doc. 6). The case was later assigned to this Court, and the SEC moved for entry of default judgment on June 8, 2018. (Doc. 9). On February 14, 2019, the SEC informed the Court that Krimm pied guilty in November 2018 to securities fraud and theft in a related criminal matter brought against him by the Delaware Department of Justice and that he is expected to be sentenced in the spring of 2019. (Doc. 14).
The SEC's allegations in the Complaint, which the Court accepts as true in the absence of any response from Defendants, include the following:
(Doc. 1 ¶¶ 20-24, 28, 31-32, 38, 44, 50-57, 59, 61-65, 67-69). The SEC alleges that Defendants violated Sections 5(a) and 5(c) of the Securities Act of 1933 ("Securities Act") ("First Claim"), 15 U.S.C. §§ 77e(a), 77e(c); Section 17(a) of the Securities Act ("Second Claim"), 15 U.S.C. § 77q(a); and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and the related Rule 10b-5 ("Third Claim"), 17 C.F.R. § 240.10b-5. (Doc. 1 ¶¶ 71-81). The SEC also alleges that the Court has jurisdiction over this action under the federal securities laws and that venue is proper. (Id. ¶¶ 8-9).
Pursuant to the Federal Rules of Civil Procedure, "[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". Fed. R. Civ. P. 55(a). Upon the party's request, the clerk of court may then enter default judgment, but only if the claim is for a sum certain or one that can be made certain by computation, the defendant has made no appearance, and the defendant is not a minor or incompetent. Id. at 55(b)(1). In all other cases, the party seeking a default judgment must make an application to the court. Id. at 55(b)(2).
Although the entry of default judgment is "left primarily to the discretion of the district court", the discretion is not limitless given that cases should "be disposed of on the merits whenever practicable." Hritz v. Woma Corp., 732 F.2d 1178, 1180-1181 (3d Cir. 1984). "Where a court enters a default judgment, `the factual allegations of the complaint, except those relating to the amount of damages, will be taken as true.'" DIRECTV, Inc. v. Pepe, 431 F.3d 162, 165 n. 6 (quoting Comdyne I, Inc. v. Corbin, 908 F.2d 1142, 1149 (3d Cir. 1990)). "The court's initial inquiry is `whether the unchallenged facts constitute a legitimate cause of action.'" Joe Hand Promotions, Inc. v. Yakubets, 3 F.Supp.3d 261, 270 (E.D. Pa. 2014) (quoting 10A Charles Alan Wright, Arthur R. Miller, et al., Federal Practice and Procedure § 2688 (3d ed. 2013)); accord Pope v. United States, 323 U.S. 1, 12 (1944). Further, in determining whether to grant a motion for default judgment, a Court must also consider three factors: "(1) prejudice to the plaintiff if default is denied, (2) whether the defendant appears to have a litigable defense, and (3) whether defendant's delay is due to culpable conduct." Chamberlain v. Giampapa, 210 F.3d 154, 164 (3d Cir. 2000) (citing United States v. $55,518.05 in U.S. Currency, 728 F.2d 192, 195 (3d Cir. 1984)).
The Court has reviewed the Complaint (Doc. 1) and the SEC's brief in support of its motion for entry of default judgment (Doc. 10) and supporting declarations (Doc. 11, Doc. 12) and finds that the entry of default judgment against Defendants is warranted, as the SEC has sufficiently shown that Defendants have violated federal securities laws and each of the Chamberlain factors, Chamberlain, 210 F.3d at 164, is satisfied. Further, in making this determination, the Court finds that the declaration of Jacquelyn D. King, Staff Accountant in the Division of Enforcement in the Philadelphia Regional office of the SEC (Doc. 11), together with the declaration's supporting attachments, presents competent, complete, credible and substantial evidence to support this Court's entry of judgment by default against Defendants as well as the specific remedies sought by the SEC and granted by this Court.
The SEC has established that the Court has jurisdiction over this matter and that Defendants violated federal securities laws. Specifically, the SEC's Complaint alleges that Defendants conducted unlawful sales of unregistered securities because the promissory notes Defendants sold or offered for sale were required to be registered with the SEC and Defendants made material misrepresentations or omissions to potential investors or otherwise defrauded them in violation of the Securities Act and the Exchange Act and the associated Rule 10b-5.
The SEC's First Claim is that Defendants violated Sections 5(a) and 5(c) of the Securities Act. These legal provisions prohibit the offering for sale or sale of unregistered securities that are required to be registered with the SEC. 15 U.S.C. §§ 77e(a), 77e(c). Promissory notes are typically considered securities and must be registered with the SEC. 15 U.S.C. § 77b(a)(1); 15 U.S.C. § 78c(a)(10); see also Reves v. Ernst & Young, 494 U.S. 56, 60-61, 64-65 (1990) (noting broad definition of "security" in the Securities Act and Exchange Act and that notes are presumed to be securities); SEC v. Infinity Grp. Co., 212 F.3d 180, 187 (3d Cir. 2000) (investment contracts in a common enterprise seeking profits solely from the effort of others are securities) (citing SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1944)). The Complaint alleges that the promissory notes sold or offered for sale by Defendants are securities that required registration statements from the SEC, the promissory notes were not registered with the SEC, and the promissory notes were not otherwise exempt from registration. (Doc. 1 ¶¶ 20-24, 28, 59, 71-75).
The SEC's Second and Third Claims are that Defendants violated Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), and Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and the associated Rule 10b-5, 17 C.F.R. § 240.10b-5. As the SEC correctly details in its brief in support of its motion for default judgment, establishing violations of these laws requires a showing that Defendants:
(Doc. 10 at 11-12). The Complaint contains a litany of specific allegations that Defendants made false statements to prospective investors in enticing them to buy promissory notes, including that KFS was licensed to lend in multiple states and that KFS operated "mortgage net branch offices" in multiple states and that these offices generated specified amounts in mortgage loans per month. (Doc. 1 ¶¶ 32-37). The Complaint also alleges that Defendants provided "false and contradictory income statements" for KFS, made "false and unreasonable revenue and profit projections," and made false representations or material omissions regarding the use of investor funds. (Id. ¶¶ 38-56). The Complaint alleges that Defendants knowingly, recklessly, or negligently made these unlawful representations. (Id. ¶¶ 67-68, 76-81).
Turning next to the Chamberlain factors, the first factor regarding prejudice to the SEC if default is denied weighs in favor of the SEC. Absent the default judgment, the SEC will be faced with an indefinite, and possibly permanent, delay in the adjudication of its claims and is left with no alternative means to vindicate its claims against the defaulting parties, including obtaining the monetary relief it alleges it is owed.
As to whether Defendants appear to have a litigable defense, this factor also weighs in favor of the SEC. "The showing of a meritorious defense is accomplished when `allegations of defendant's answer, if established on trial, would constitute a complete defense to the action.'" $55,518.05 in U.S. Currency, 728 F.2d at 195 (citing Tozer v. Charles A. Krause Milling Co., 189 F.2d 242, 244 (3d Cir. 1951); Farnese v. Bagnasco, 687 F.2d 761, 764 (3d Cir. 1982)). In the present action, no Defendant has filed an answer or performed any other action to defend the case or set forth any meritorious defenses.
Finally, the third factor, whether Defendants' delay is due to culpable conduct, also weighs in favor of the FTC. "In this context culpable conduct means action taken willfully or in bad faith." Gross v. Stereo Component Sys., Inc., 700 F.2d 120, 123-24 (3d Cir. 1983). Defendants have been on notice of this action since, at the very latest, June 14, 2017, when they signed waivers of the service of summons. (See Doc. 3, Doc. 4). Thus, the defendants have failed to respond or take any other action to defend this lawsuit for close to two years. At minimum, this lack of action amounts to deliberate and willful conduct.
The SEC seeks entry of final judgments against Defendants imposing permanent injunctions prohibiting the kinds of violations of the federal securities laws challenged in the Complaint and ordering that Defendants are jointly-and-severally liable for disgorgement of ill-gotten gains along with prejudgment interest and a civil penalty equal to the amount of disgorgement. (Doc. 9-2, Doc. 9-3). Pursuant to the Federal Rules of Civil Procedure, a Court "may conduct hearings or make referrals ... when, to enter or effectuate judgment, it needs to: (A) conduct an accounting; (B) determine the amount of damages; (C) establish the truth of any allegation by evidence; or (D) investigate any other matter." Fed. R. Civ. P. 55(b)(2). The Court is satisfied that the briefing and supporting declarations submitted by the SEC in support of its motion for entry of default judgment, in addition to the uncontroverted factual allegations in the Complaint, obviate the need for a hearing or referral and demonstrate the propriety of the SEC's proposed final judgments.
The Securities Act, 15 U.S.C. § 77t(b), and the Exchange Act, 15 U.S.C. § 78u(d), authorize the SEC to seek and obtain permanent injunctions in federal court for violations of those laws. A court considers whether, absent a permanent injunction, a defendant will reengage in illegal conduct. SEC v. Bonastia, 614 F.2d 908, 912 (3d Cir. 1980). In making this determination, "courts have looked to, among other things, the degree of scienter involved on the part of the defendant, the isolated or recurrent nature of the infraction, the defendant's recognition of the wrongful nature of his conduct, the sincerity of his assurances against future violations, and the likelihood, because of defendant's professional occupation, that future violations might occur." Id.
The SEC's case against Defendants outlines what was essentially a Ponzi scheme operated from at least May 2012 through January 2014 that resulted in hundreds of thousands of dollars in losses to unsophisticated investors and that was perpetrated through numerous and serious false representations intended to convince prospective investors that a sham mortgage business was a legitimate investment opportunity. Krimm himself took $500,000 from investor funds to line his own pockets. (Doc. 1 ¶¶ 53-54, Doc. 11 ¶ 135). Defendants have not responded to the Complaint and have made no representations to the Court that indicate that future violations of the law are unlikely. In these circumstances, the Court finds it appropriate to issue permanent injunctive relief enjoining Defendants from violating the Securities Act and the Exchange Act in the future, which is proper in cases of this nature. See, e.g., SEC v. Infinity Grp. Co., 212 F.3d 180, 184 (3d Cir. 2000) (affirming permanent injunction prohibiting future violations of federal securities laws in a Ponzi scheme case); SEC v. Stinson, No. 10-cv-3130, 2011 WL 2462038, at *6 (E.D. Pa. June 20, 2011) (imposing permanent injunction in Ponzi scheme case).
The SEC's requested amount of joint-and-several monetary relief against Defendants in the form of disgorgement, prejudgment interest, and civil penalties is also appropriate.
Likewise, the Court will accept the SEC's calculation of prejudgment interest of $161,277, which is within the Court's discretion to award. Teo, 746 F.3d at 109-110 (explaining that award of prejudgment interest in an SEC federal court action was appropriate and "consistent with [the SEC's] own regulation" regarding such an award in an SEC administrative action, 17 C.F.R. § 201.600); (Doc. 11 ¶ 139 (explaining calculation of prejudgment interest by applying IRS underpayment rate on an individual investor basis)).
Finally, the Court will order Defendants to pay the SEC's requested civil penalty in the amount of disgorgement, $913,537. As set forth by the SEC in its brief in support of its motion for entry of default judgment, the Securities Act, 15 U.S.C. § 77t(d)(2)(C), and the Exchange Act, 15 U.S.C. § 78u(d)(3)(B), provide for the awarding of civil penalties in certain cases. (Doc. 10 at 18). The highest level of civil penalties, "third tier" civil penalties, are available when the unlawful conduct (1) "involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement; and [(2)] such violation directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons." 15 U.S.C. § 77t(d)(2)(C); 15 U.S.C. § 78u(d)(3)(B). Third tier civil penalties can be awarded in an amount equal to the amount of disgorgement, and is proper in cases when it may be difficult to determine the exact number of violations. SEC v. Graulich, No. 09-cv-4355, 2013 WL 3146862, at *7 (D.N.J. June 19, 2013). The Court finds such an award is warranted here, given the egregious nature of Defendants' scam and the amount of harm caused to investors.
For the foregoing reasons, the Court will grant the SEC's motion for entry of default judgment (Doc. 9) and enter default judgment in the amount of $913,537 in disgorgement, $161,277 in prejudgment interest, and a civil penalty in the amount of $913,537.
A separate Order and final judgments against Defendants follow.
