S.E.C. v. McNulty

• Citation: 137 F.3d 732
• Decision Date: 03 March 1998
• Docket Number: Docket No. 97-6122
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Robert J. McNULTY, George G. Handgis, Franklin D. Roberts, John M. Shanklin And W.N. Thompson, Defendants, John M. Shanklin, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 732

137 F.3d 732

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Robert J. McNULTY, George G. Handgis, Franklin D. Roberts, John M. Shanklin And W.N. Thompson, Defendants, John M. Shanklin, Defendant-Appellant.

Docket No. 97-6122.

United States Court of Appeals,

Second Circuit.

Argued Nov. 17, 1997.

Decided March 3, 1998.

Susan K. Straus, Washington, DC (Richard H. Walker, General Counsel, Jacob H. Stillman, Associate General Counsel, Susan Ferris

Wyderko, Assistant General Counsel, Paul Gonson, Solicitor, Washington, DC, on the brief), for Plaintiff-Appellee.

Gregg A. Rapoport, Los Angeles, CA (Jack I. Samet, Baker & Hostetler, Los Angeles, CA, on the brief), for Defendant-Appellant.

Before: KEARSE and CARDAMONE, Circuit Judges, and LEISURE, District Judge ^*.

KEARSE, Circuit Judge:

Defendant John M. Shanklin, against whom a default judgment was entered in the United States District Court for the Southern District of New York for failure to answer the complaint filed by plaintiff Securities and Exchange Commission ("SEC" or the "Commission"), challenges the order of that court, Michael B. Mukasey, Judge, denying his motion to vacate the default judgment. In denying the motion, the district court ruled that Shanklin had failed to show that the default was not willful and that he was not culpable, and had failed to proffer a meritorious defense to the SEC's claims. On appeal, Shanklin contends principally that the district court erred in imputing his attorney's neglect to him and in failing to resolve doubts as to the merits of Shanklin's defenses in his favor. Finding no merit in these contentions, we affirm.

I. BACKGROUND

The present action was commenced against Shanklin and others, including defendant Robert J. McNulty, in connection with several corporations controlled by McNulty, which in 1988-1990 had raised $78 million through various public and private offerings of securities. According to the complaint, portions of these moneys were diverted to McNulty and other entities he controlled, an intended use that the defendants had fraudulently concealed. Shanklin, during part of the pertinent period, was an officer and director of two McNulty companies: Auto Giant, Inc. ("Auto Giant"), of which he was executive vice president, chief executive officer, and chief operating officer; and Auto Depot, Inc. ("Auto Depot"), of which he was president, chief executive officer, chief operating officer, and chief administrative officer. In those capacities, Shanklin was responsible for the two companies' internal books and records and for their annual and quarterly filings with the SEC. The complaint alleged that company books and certain of the SEC filings misrepresented or falsely concealed material transactions, and that Shanklin knew, or recklessly failed to know, of those misrepresentations or concealments.

A. The Default

The present action was commenced on September 30, 1994, following a lengthy SEC investigation in which Shanklin had been represented by Fred Rucker, Esq. The complaint described the conduct of the defendants in connection with the McNulty companies' securities offerings and, to the extent pertinent here, alleged that Shanklin had engaged in, and unless enjoined would continue to engage in, conduct violative of §§ 10(b), 13(a), and 13(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b), 78m(a), and 78m(b) (1994), and various SEC Rules promulgated thereunder, including Rule 10b-5, 17 C.F.R. § 240.10b-5 (1997). The SEC requested, inter alia, the imposition of a civil fine and the entry of a permanent injunction forbidding such violations. On October 28, Shanklin acknowledged receipt of a copy of the complaint and waived service of summons. He forwarded the complaint to Rucker as his attorney.

Shanklin's time to answer the complaint was extended to December 13, 1994, and then to December 27. Rucker did not file an answer on behalf of Shanklin or move to dismiss the action. Nor did he attend any of the pretrial conferences called by the district court or, despite co-counsel's urging, join in the other defendants' motions to dismiss or to change venue. Although Rucker and the SEC discussed settlement of the case against Shanklin, those discussions proved fruitless. In April 1995, with Shanklin's answer some The district court, receiving no response to the motion, entered a default judgment against Shanklin on September 11, 1995. The judgment enjoined Shanklin from violating §§ 10(b), 13(a), and 13(b) of the 1934 Act, 15 U.S.C. §§ 78j(b), 78m(a) and 78m(b), and several SEC Rules. The judgment directed that further proceedings be held before a magistrate judge to determine the amount of Shanklin's civil fine.

four months overdue, the SEC sent Rucker a letter stating that if the answer were not forthcoming the Commission would seek entry of a default. The SEC sent Rucker similar letters in May and June. No answer was ever filed. The SEC moved for entry of a default in August 1995.

The SEC served copies of the default judgment on both Rucker and Shanklin. Shanklin eventually returned to the SEC an affidavit acknowledging his receipt of the judgment. Rucker wrote to SEC Branch Chief James P. Bodovitz, stating that he had believed settlement negotiations were ongoing and threatening to "seek relief from the default." (Letter from Fred Rucker to James P. Bodovitz, dated September 29, 1995). Bodovitz wrote back, dismissing Rucker's position as "patently incorrect" and pointing out that

I wrote letters to you in ... regard [to the SEC's intention to seek a default judgment] on April 11, 1995, April 26, 1995, May 11, 1995, June 1, 1995, and June 25, 1995. You responded to none of these letters.

(Letter from James P. Bodovitz to Fred Rucker, dated October 2, 1995.)

In mid-November 1995, Rucker filed Shanklin's opposition to the request for monetary sanctions. That submission stated that "Shanklin will be filing within the next two days a motion for relief from [the] default." (Opposition of Defendant John M. Shanklin to Imposition of Civil Monetary Penalties, dated Nov. 15, 1995, at 2 n. 1.) In a letter sent contemporaneously to Shanklin, Rucker stated that he was "in the process of preparing a motion for relief from the default." (Letter from Fred Rucker to John M. Shanklin, dated November 17, 1995.) Rucker never filed such a motion.

B. Denial of the Motion To Vacate

In May 1996, Shanklin substituted new counsel and moved under Fed.R.Civ.P. 60(b)(1) and 60(b)(6) to vacate the default judgment. The motion argued principally (a) that Rucker alone was responsible for Shanklin's failure to answer the complaint, (b) that the SEC could not prove its claims against Shanklin because it could not establish his scienter, and (c) that the entry of injunctive relief against him was inappropriate. In support of the motion, Shanklin submitted his affidavit stating, inter alia, that until his new attorneys obtained Rucker's files, Shanklin had been unaware of the SEC's threats to move for default if he did not answer. Further, Shanklin stated that after the default judgment was entered he believed Rucker would move to vacate the default, because Rucker promised to do so and in fact thereafter billed Shanklin for work in connection with the promised motion. (Affidavit of John M. Shanklin in Support of Motion To Set Aside Default Judgment, dated May 16, 1996 ("Shanklin Aff."), pp 2-24.) Shanklin's affidavit also described his involvement with the McNulty companies, denying any role in the public offerings, explaining his conduct in connection with the SEC reports as to certain intra-organization money transfers, and maintaining that he had had no knowledge of any misstatements in corporate filings or other documents. (Id. pp 25-34.) In arguing that there were no grounds for the entry of an injunction against him, Shanklin stated, inter alia, that prior to joining the McNulty companies, he "had held executive positions and was responsible for the financial, administrative and operational functions within several major publicly-held corporations" (id. p 36), and that in his "more than 20 years of senior management experience, and over 30 years of overall corporate management," he had "prepared and signed numerous securities filings, and apart from this case, ha[d] not once even been criticized or questioned about the accuracy or completeness of the[ ] disclosures" (id. p 37).

The SEC opposed the motion to vacate the default, submitting various exhibits to show In an Opinion and Order dated July 26, 1996 ("Opinion"), the district court denied Shanklin's motion to vacate. The court considered "(1) whether the default was willful, (2) whether setting aside the default would prejudice the [SEC], and (3) whether [Shanklin] ha[d] presented a meritorious defense to the action," noting that it would "apply these factors generously, and resolve any doubts in favor of the defaulting party." Opinion at 6. Following a thorough analysis of the record, described below, the court found that the default was willful and should be imputed to Shanklin; that the delay occasioned by setting aside the default would prejudice the SEC, albeit only slightly; and that Shanklin had not shown that he had a meritorious defense to the SEC's claims.

both willfulness and the lack of merit in Shanklin's defenses. The Commission argued that willfulness was revealed by the sequence of events, including the Commission's repeated letters to Rucker advising him that the Commission was about to move for a default, Rucker's inaction in the face of those warnings, and the lack of any motion to vacate the default judgment until some eight months after its entry. As to Shanklin's defense of lack of scienter, the Commission argued that § 13 and the SEC Rules thereunder, which require publicly-traded companies to keep records that accurately and fairly reflect their dispositions of assets, and to file with the...