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Securities and Exchange Commission v. Lee

United States District Court, S.D. California

October 7, 2019

Securities and Exchange Commission, Plaintiff,
James Y. Lee, et al., Defendants,


          Hon. Bernard G. Skomal United States Magistrate Judge


         Before the Court is Judgment Debtor James Y. Lee's (“Lee”) and Judgment Debtor Larissa O. Ettore's (“Ettore”) motion for release of frozen funds to pay counsel in connection with a pending civil contempt proceeding. (ECF No. 199.) Alternatively, Lee and Ettore (collectively the “Judgment Debtors”) request counsel be appointed to represent them in the contempt proceeding free of charge. (Id. at 199-1 at 16-17.) The United States Securities and Exchange Commission (“SEC”) opposes the motion. (ECF No. 200.) For the reasons set forth below, the request for release of frozen funds and the alternative request for appointment of counsel (ECF No. 199) are both DENIED.


         A. Related Actions

         This is one of three related civil cases pertaining to a fraudulent investment scheme orchestrated by Lee. In one related case, SEC. v. Lee, 14-cv-1737 (S.D. Cal), Lee was ordered to disgorge more than $2.8 million, plus prejudgment interest. (SEC v. Lee, 14-cv-1737 (S.D. Cal), ECF No. 14.) In another related case brought by defrauded investors and still pending, Ayers v. Lee, 14-cv-542 (S.D. Cal.), a default judgment exceeding $6.8 million was entered against Lee on March 3, 2017. (Ayers v. Lee, 14-cv-542 (S.D. Cal.), ECF Nos. 141, 143.) Ettore is the only remaining defendant in that ongoing action. (See docket.)

         In addition to these civil actions, Lee pled guilty in a 2014 criminal case, United States v. Lee, 14-cr-2937 (S.D. Cal.), to obstructing justice and engaging in false, fraudulent and deceptive conduct to hinder the United States from collecting on a criminal judgment and restitution order stemming from a 1997 criminal conviction for wire fraud and embezzlement. (United States v. Lee, 14-cr-2937 (S.D. Cal.), ECF No. 8 at 3-6.) On May 21, 2015, Lee was sentenced to 78 months imprisonment plus three years supervised release. (United States v. Lee, 14-cr-2937 (S.D. Cal.), ECF No. 44.) He remains incarcerated.

         B. Judgments in This Action Against Lee and Ettore

         In the instant action, on February 13, 2014 the SEC filed a complaint against Lee and Ettore alleging that Lee violated securities laws via a fraudulent investment scheme, and that Ettore as a relief defendant had payments from that scheme diverted to her. (ECF No. 1.) The Honorable Chief Judge Larry Alan Burns entered a consent judgment against Lee in which Lee stipulated that he:

violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5], Sections 17(a)(1) and (a)(2) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. §§ 77q(a)(1) and (a)(2)], and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (“Advisers Act”) [15 U.S.C. §§ 80b-6(1) and (2)] . . . .

(ECF No. 80 at 3; see also ECF No. 82.) As part of the consent judgment, Lee was ordered to pay disgorgement in the amount of $1, 880, 263 and prejudgment interest in the amount of $322, 762.95. (ECF No. 82 at 4.)

         Based on Ettore's obstructionist conduct during the litigation, terminating sanctions were entered against her. (ECF No. 101.) Chief Judge Burns determined that her conduct was her “own fault”, “willful, and demonstrated bad faith.” (Id. at 3-4 [Ettore's “bad faith and willful misbehavior [has] successfully delayed the SEC's recovery, and imposed costs on the SEC”].) Judgment was entered against Ettore on February 3, 2017. (ECF No. 103.) She was ordered to disgorge $386, 694.25, together with prejudgment interest in the amount of $76, 790.70, for a total of $463, 484.95, plus post-judgment interest. (ECF No. 103 at 3, 5.)

         C. Contempt Proceedings

         On July 12, 2018, the SEC filed a Motion for Order to Show Cause why Lee and Ettore should not be held in civil contempt based on their failure to pay their ordered disgorgement despite their ability to do so. (ECF No. 162.) As part of this motion, the SEC also sought an order freezing all of Lee and Ettore's assets and those held by certain third parties, requiring them to provide the SEC with a full accounting of their assets and enter into installment payment orders with the SEC. (ECF Nos. 162-1 at 17-19; 166; 169.)

         On February 20, 2019, the SEC's motion was granted and the issue of whether Lee and Ettore should be held in contempt, as well as any related motions or requests, was referred to this Court for a hearing and Report and Recommendation. (ECF No. 187.) On the same day, an Order Freezing Assets (ECF No. 188) and an Order to Disburse Garnished Funds (ECF No. 189) were also issued.

         In the Order Freezing Assets, Chief Judge Burns noted that in the SEC's motion seeking a finding of contempt, it “submitted records showing how Lee and Ettore have been using third parties or nominees to conduct their personal and professional business so as to avoid the Commission's collection efforts, ” and ordered that:

an immediate freeze shall be placed on all monies and assets including, but not limited to, those held by third parties or found in all accounts at any bank, financial institution or brokerage firm, of third-payment processor, all certificates of deposit, escrow or trust accounts, and other funds or assets held in the name of, for the benefit of, or over which account authority is held by Defendant James Y. Lee and/or Larissa O. Ettore, whether (1) held in their names or individual capacity; (2) controlled by them; (3) they have any beneficial interest; (4) held by any of their affiliates, correspondent entities, or nominees; and (5) they have any other interest, whether in the United States or abroad.

(ECF No. 188 at 2-3.) The Order Freezing Assets also specifically applied to the following third parties: Ulla Ettore, Roger Ettore, Timo Ettore, Lolita Gatchalian and Jean Lee. (Id. at 3.)

         The Order to Disburse Garnished Funds directed several financial institutions to turn over certain funds to the SEC held in accounts owned by family members of Larissa Ettore, ...

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