The opinion of the court was delivered by: Hon. Jeffrey T. Miller United States District Judge
ORDER GRANTING MOTION FOR ENTRY OF DEFAULT JUDGMENT
The Securities and Exchange Commission ("SEC") moves for entry of default judgment against Global Health, Global Clearing, Global Strategies, and Goldman Quintero & Associates (collectively "Defendants"). Defendants have not filed a response to the motion. The individual defendants, Vince Dory and Joshua Adams, have similarly not responded to the motion. Pursuant to Local Rule 7.1(d)(1), this matter is appropriate for decision without oral argument. For the reasons set forth below, the motion for entry of default judgment is granted. By separate order, the court enters final judgment against Defendants.
On September 9, 2004 the SEC commenced this action alleging that Defendants were violating various securities laws through a fraudulent investment scheme. Defendants Global Clearing, Global Strategies, and Goldman Quintero & Associates purported to act as brokers and individual defendants Vince Dory and Joshua Adams held themselves out as account representatives of these entities.
The scheme involved cold-calling potential investors, primarily elderly investors, and convincing them to buy shares in a non-existent, non-registered security: Global Health. As part of the scheme, Defendants allegedly falsified stock certificates and told investors that the FDA had approved Global Health's new drug. Defendants claimed that Global Health had developed a successful new cancer treatment. As part of the scheme, Defendants provided forged documents, on FDA letterhead, indicating that clinical trials of the cancer drug "demonstrate the effectiveness of this specific therapy, with little or no side effects." Upon receipt of checks from investors, the monies were deposited in Mexican bank accounts.
On September 9, 2004 the SEC moved for a temporary restraining order ("TRO") enjoining future securities law violations. The court granted the TRO and imposed an asset freeze. The SEC attempted service but were unable to locate any of the Defendants. Pursuant to court order, Defendants were served at their place of business and by publication in three newspapers of general circulation. Defendants have not responded to the complaint nor have the individual defendants.
On September 19, 2006 the Clerk of Court entered default against each Defendant. The SEC now moves for entry of default judgment against each Defendant. A motion for entry of default judgment against individual defendants Vince Dory and Joshua Adams is calendared for January 2007.
Federal Rule of Civil Procedure 55(b) provides, in pertinent part, that after entry of default, "the party entitled to a judgment by default, shall apply to the court therefor." Ordinarily, the default itself establishes defendant's liability. "Upon default, the well-pleaded allegations of the complaint relating to liability are taken as true," but not allegations as to the amount of damages. Dundee Cement Co. v. Howard Pipe & concrete Products, 722 F.2d. 1319, 1323 (3rd Cir. 1983); TeleVideo systems Inc. v. Heidenthal, 826 F.2d. 915, 917 (9th Cir. 1994). The amount of damages may be determined from the allegations of the complaint although those allegations are not controlling. Dundee, 722 F.2d. at 1323-24. Where plaintiff is entitled to reasonable attorney's fees by either contract or statute, the court will determine the amount to be awarded. James v. Frame, 6 F.3d 307, 311 (3rd Cir. 1993).
The granting or denying of a default judgment is within the court's sound discretion. See Draper v. Combs, 792 F.2d 915 (9th Cir. 19986). The following factors are considered in determining whether to grant a default judgment: the substantive merits of plaintiff's claim; the sufficiency of the complaint; the amount of money at stake; the possibility of prejudice to plaintiff if relief is denied; and the possibility of dispute as to any material facts in the case. Moreover, where practicable, policy considerations militate in favor of considering cases on their merits rather than resolving matters through default judgment procedures. Schwab v. Bullock's, Inc., 508 F.2d 353, 355 (9th Cir. 1974).
Here, the complaint's allegations establish that Defendants violated the Federal Securities Laws by, among other things, violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§77e(1) and 77e(c), by selling unregistered securities. Defendants sold Global Health, an unregistered security, without complying with the registration requirements. Defendants Global Clearing, Global Strategies and Goldman Quintero & Associates also violated the broker registration provisions of 15 U.S.C. §78o(a)(1) when they actively and fraudulent engaged in the sale of investments without complying with the brokerage registration requirements. Defendants also violated the anti-fraud provisions of Section 10(b) when they knowingly made material misrepresentations in connection with the sale of Global Health securities. Having established liability, the only other issue concerns appropriate remedies.
Permanent Injunction. Section 20(b) of the Securities Act, 15 U.S.C. §77t(b), and section 21(d) of the Exchange Act, 15 U.S.C. §78u(d)1), provide that upon proper showing, a permanent injunction shall be granted in enforcement actions brought by the SEC. The SEC's burden is met upon a showing that establishes a reasonable likelihood of a future violation of the securities laws. SEC v. Murphy, 626 F.2d 633, 655 (9th Cir. 1980). Looking to the totality of the circumstances, the court concludes that Defendants have acted brazenly and egregiously by falsely claiming -- by means of forged FDA documents -- that Global Health, a non-existent company, had obtained FDA approval to sell a non-existing drug for curing cancer. Defendants' wrongful conduct occurred over a prolonged period of time. Accordingly a permanent inunction is warranted to protect the public and to prohibit Defendants from continuing with their fraudulent schemes.
Disgorgement. The SEC also seeks the remedy of disgorgement. Disgorgement is an equitable remedy designed to compel a defendant "to give up the amount by which he was unjustly enriched" and to deter him and others from committing securities law violations by making them unprofitable. SEC v. J.T. Wallenbrock, 440 F.3d 1109, 1113 (9th Cir. 2006). The court finds that disgorgement is an appropriate remedy and, based upon the evidence submitted by the SEC, concludes that Defendants ill-gotten gains total $247,250. The court also awards prejudgment interest through December 1, 2006 in the amount of $11,328.39, pursuant to 28 U.S.C. §1961, for a total amount of $258,578.39.
Civil Penalties. Section 20(d) of the Securities Act and section 21(d)(3) of the Exchange Act explicitly provide for the payment of civil monetary penalties in SEC enforcement cases. 15 U.S.C. §77t(d) and 78u(d)(3). Civil penalties were enacted by Congress "to achieve the dual goals of punishment of the individual and deterrence of future violations." SEC v. Moran, 944 F.Supp. 286, 296 (S.D.N.Y. 1996). Penalties are available in three separate tiers. The first tier provides for a penalty of up to $60,000. The second tier provides for a penalty of up to $300,000 where the violation involved "fraud, deceit, manipulation, or deliberate or reckless disregard or a regulatory requirement." The Third tier provides for a penalty of up to $600,000 or the amount of the defendant's gain if, in addition to the second tier elements, the violation directly or indirectly resulted in substantial losses (or the risk of substantial losses) to other persons. The amount of ...