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Securities and Exchange Commission v. Loomis

August 23, 2010

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
LAWRENCE "LEE" LOOMIS, LOOMIS WEALTH SOLUTIONS, LLC, JOHN HAGENER, AND LISMAR FINANCIAL SERVICES, LLC, DEFENDANTS.



The opinion of the court was delivered by: Kendall J. Newman United States Magistrate Judge

ORDER and FINDINGS AND RECOMMENDATION

Presently before the court is plaintiff's motion for default judgment against two of the four named defendants: Loomis Wealth Solutions, LLC ("LWS"), and Lismar Financial Services, LLC ("Lismar").*fn1 (Dkt. No. 20.) Having concluded that oral argument would not materially assist the court, the undersigned hereby submits plaintiff's motion on the briefing and record on file and will vacate the hearing date. The undersigned has fully considered the briefing and record in this case and, for the reasons stated below, will recommend that plaintiff's motion for default judgment against LWS and Lismar be denied without prejudice.

I. RELEVANT FACTUAL BACKGROUND

On February 23, 2010, plaintiff filed a complaint against LWS, Lismar, defendant Lawrence "Lee" Loomis ("Loomis"), and defendant John Hagener ("Hagener") in connection with an alleged "Ponzi scheme."*fn2 (Dkt. No. 1.) Plaintiff alleges that Loomis is a resident of Granite Bay, California, who controlled LWS, which purported to be a financial planning company. (Compl. ¶¶ 9, 11.) Plaintiff further alleges that Hagener is Loomis's father-in-law and a resident of Roseville, California, who owned and controlled Lismar, which in turn was the managing member of certain real estate investment funds at issue here. (Id. ¶¶ 10, 12.)

Generally, plaintiff alleges that Loomis and Hagener, through LWS and Lismar, misappropriated approximately $10 million dollars from more than 100 investors located, for the most part, in California. (See id. ¶ 1.) Plaintiff alleges that Loomis and Hagener solicited individuals to invest in two real estate investment funds, referred to as the "Naras Funds," which were allegedly marketed as secure investments that were guaranteed by a third party and would offer a return of approximately 12% on investments. (Id.) Plaintiff alleges that none of these representations were true and that Loomis and Hagener were secretly diverting assets from the Naras Funds to pay the operating expenses and other expenses of other entities controlled by Loomis and Hagener. (Id. ¶¶ 2, 3.) In short, plaintiff alleges that "Loomis and his company, [LWS], and Hagener and his company, [Lismar] (collectively, "Defendants"), violated numerous provisions of the federal securities laws, including the antifraud statutes, by misappropriating investor assets, making materially false and misleading statements in connection with the purchase or sale of securities, and perpetrating a fraud on their investors." (Id. ¶ 5.)

Plaintiff alleges six claims for relief in its complaint, and each claim is alleged against at least one individual defendant and one entity defendant. In pertinent part, plaintiff's first claim alleges that all defendants violated Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. (Compl. ¶¶ 52-54.) Its second claim alleges that all defendants violated Section 17(a)(1) of the Securities Act, 15 U.S.C. § 77q(a). (Compl. ¶¶ 56-58.) Its third claim alleges that all defendants violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, 15 U.S.C. § 77q(a)(2), (3). (Compl. ¶¶ 59-61.) Plaintiff's fourth claim alleges that Hagener and Lismar violated Sections 206(1) and 206(2) of the Advisers Act, 15 U.S.C. § 80b-6(1), (2). (Compl. ¶¶ 62-66.) Its fifth claim alleges that Hagener and Lismar violated Section 206(4) of the Advisers Act, 15 U.S.C. § 80b-6(4), and Rule 206(4)-8, 17 C.F.R. § 275.206(4)-8(b). (Compl. ¶¶ 68-72.) Finally, plaintiff alleges that all defendants violated Section 5(a) and 5(c) of the Securities Act, 15 U.S.C. § 77e(a), (c). (Compl. ¶¶ 74-77.) Plaintiff seeks to enjoin all of the defendants from further violations of the securities laws, the disgorgement of defendants' ill-gotten gains, and the payment of civil monetary penalties by defendants. (Id. ¶ 5 & pp. 15-16.)

As discussed below, the precise nature of the violations of the various federal statutes and rules allegedly effectuated through the Naras Funds is not of paramount importance to the pending motion. What is important for the purposes of resolving plaintiff's motion for default judgment is that these various claims are simultaneously alleged against the entity defendants and the individual defendants. There is significant overlap between the acts of the entity defendants and the acts of the individual defendants, which is to be expected given plaintiff's allegations that Loomis and Hagener were agents of LWS and Lismar, and that Loomis and Hagener effectuated their scheme to defraud investors through their control of LWS and Lismar. Thus, it is apparent from the complaint that the individual defendants and entity defendants can be fairly described as similarly situated for the purpose of assessing liability, at least insofar as the factual allegations in the pleadings are concerned.

Although Loomis and Hagener have appeared in this action and filed answers to plaintiff's complaint*fn3 (Dkt. Nos. 8, 9), the court's docket reveals that LWS and Lismar have not appeared in this action through counsel or otherwise. Plaintiff filed two declarations of service with the court, which are attached to plaintiff's requests for entry of default.*fn4 (Dkt. Nos. 13, 14.) One declaration indicates that plaintiff, through a process server, served LWS by serving Loomis, who is the managing member of LWS, by substitute service.*fn5 (Dkt. No. 13, Doc. 13-1.) The declaration reflects that on March 7, 2010, plaintiff's process server left the summons, complaint, and related case opening documents with Loomis's wife at their residence or usual place of abode, and mailed a copy as well. Service on LWS appears to be proper pursuant to Federal Rules of Civil Procedure 4(h)(1)(A) and 4(e)(1).*fn6

The second declaration of service indicates that plaintiff's process server served Lismar by transmitting the summons, complaint, and related case opening documents via FedEx to The Corporation Trust Company, which is Lismar's agent for service of process. (Dkt. No. 14, Doc. 14-1.) Service on Lismar appears to be proper pursuant to Federal Rule of Civil Procedure 4(h)(1)(B).

On June 9, 2010, plaintiff filed a Certificate of Service, which indicates that plaintiff served Loomis, LWS, and Lismar with: (1) the declarations of service of process on LWS and Lismar, and (2) requests for entry of default against LWS and Lismar. (Dkt. No. 15.)

On June 10, 2010, the Clerk of this Court entered default against LWS and Lismar. (Dkt. No. 16.) In its certificate of entry of default, the Clerk of Court stated that it appeared from the record and papers on file that LWS and Lismar were each duly served with process yet failed to appear, plead, or answer the counterclaim within the time allowed by law.*fn7

(Id.)

On July 19, 2010, plaintiff filed a motion for default judgment against LWS and Lismar, which was procedurally deficient. (See Dkt. Nos. 18, 19.) On July 22, 2010, plaintiff filed the pending, corrected motion for default judgment. (Dkt. No. 20.) Plaintiff served its motion for default judgment on LWS, Lismar, Loomis, and counsel for ...


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