S.E.C. v. Lawbaugh

• Decision Date: 14 March 2005
• Docket Number: No. CIV.A. DKC2003-2768.,CIV.A. DKC2003-2768.
• Citation: 359 F.Supp.2d 418
• Parties: SECURITIES AND EXCHANGE COMMISSION v. John J. LAWBAUGH
• Court: U.S. District Court — District of Maryland

359 F.Supp.2d 418

SECURITIES AND EXCHANGE COMMISSION v. John J. LAWBAUGH

No. CIV.A. DKC2003-2768.

United States District Court, D. Maryland.

March 14, 2005.

COPYRIGHT MATERIAL OMITTED

Merri Jo Gillette, Amy J. Greer, David S. Horowitz, US Securities and Exchange Commission, Philadelphia, PA, Thomas F. Corcoran, Office of the United States Attorney, Thomas M. DiBiagio, Baltimore, MD, for Plaintiff.

Henry St. John Fitzgerald, Law Office of Henry St. John Fitzgerald, Arlington, VA, Gloria Robinson Teasley, Attorney at Law, Greenbelt, MD, for Defendant.

MEMORANDUM OPINION

CHASANOW, District Judge.

Presently pending and ready for resolution is the motion of Plaintiff Securities and Exchange Commission ("the SEC") for entry of default judgment against Defendant John J. Lawbaugh¹ pursuant to Fed.R.Civ.P. 55(b)(2). The issues are fully briefed and the court now rules pursuant to Local Rule 105.6, no hearing being deemed necessary. For the reasons that follow, the court grants Plaintiff's motion and orders permanent injunctive relief, disgorgement, prejudgment interest, and civil penalties.

I. Background

The SEC filed the complaint in this matter on September 29, 2003, alleging securities fraud in violation of section 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77q(a); 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; and sections 17(e)(1), 34(a), 34(b) and 37 of the Investment Company Act of 1940 ("Investment Company Act"), 15 U.S.C. §§ 80a-17(e)(1), 33(a), 33(b), and 36. Specifically, Plaintiff alleges the following:

Between August 1998 and July 2002, Lawbaugh diverted in excess of $2 million from 1st Atlantic Guaranty Corporation ("1st Atlantic") and SBM Certificate Company ("SBM") through a series of fraudulent transactions. Among other things, Lawbaugh skimmed money from payments made to purchase portfolio assets, directed payments to companies he secretly controlled for services never performed, and altered documents to conceal his fraud. As a result, SBM materially misstated its financial condition and reserve levels, among other misinformation, in registration statements, prospectuses and other filings with the Commission.

In addition, beginning in at least 1997, Lawbaugh misappropriated in excess of $1 million from several individual investors by falsely representing to them that he would invest their funds in 1st Atlantic's face-amount certificates. He never invested their money as represented but converted these monies to his own use by depositing the funds into his own personal accounts. He further deceived them by preparing and disseminating false account statements, which he was still sending out as late as the Fall of 2002.

Paper no. 19, at 1-2.

II. Default

In filing the instant motion, Plaintiff, who requests injunctive relief, disgorgement, and a civil penalty, has complied with the requirement that, after obtaining entry of default by the clerk pursuant to Rule 55(a), a party seeking default judgment and relief other than a "sum certain" apply to the court. Rule 55(b)(2).

Entry of default judgment is left to the discretion of the court. Dow v. Jones, 232 F.Supp.2d 491, 494 (D.Md.2002). The Fourth Circuit has a "strong policy" that "cases be decided on their merits," Dow, 232 F.Supp.2d at 494-95 (citing United States v. Shaffer Equip. Co., 11 F.3d 450, 453 (4th Cir.1993)), but default judgment may be appropriate when the adversary process has been halted because of an essentially unresponsive party. See Jackson v. Beech, 636 F.2d 831, 836 (D.C.Cir.1980) (quoting H.F. Livermore Corp. v. Aktiengesellschaft Gebruder Loepfe, 432 F.2d 689, 691 (D.C.Cir.1970)).

Defendant has been unresponsive for more than a year. The court has not heard from him since denying his motion to dismiss on February 19, 2004. Defendant was then required by Rule 12(a)(4)(A) to answer the complaint within ten days, but did not. The clerk entered default pursuant to Rule 55(a) on May 25, 2004, upon motion properly served to Defendant's counsel. On August 10, 2004, Plaintiff filed the instant motion; it, too, was duly served upon Defendant, but Defendant has failed to reply. In short, Defendant has had ample notice of impending judgment by default, but has taken no action whatsoever. Entry of a default judgment is therefore clearly appropriate.

III. Liability

Upon default, the well-pled allegations in a complaint as to liability are taken as true, although the allegations as to damages are not. See Dundee Cement Co. v. Howard Pipe & Concrete Products, Inc., 722 F.2d 1319, 1323 (7th Cir.1983).

Plaintiff's pleadings, taken as true, establish all of the alleged violations. Fraud and deception in the sale of securities through the use of "any means or instrumentality of interstate commerce, or of the mails" is prohibited variously by section 17(a) of the Securities Act, 15 U.S.C. § 77q(a); section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b); and Rule 10b-5 of the Exchange Act, C.F.R. § 240.10b-5. Section 17(a) prohibits fraud in the offer or sale of securities, 15 U.S.C. § 77q(a); in connection with the purchase or sale of securities, Section 10(b) of the Exchange Act and Rule 10b-5 of that Act prohibit, respectively, employing "any manipulative or deceptive device or contrivance," 15 U.S.C. § 78j(b), or "any device, scheme, or artifice to defraud," C.F.R. § 240.10b-5. Taking as true the allegations in Plaintiff's complaint, Defendant clearly violated all three by "diverting approximately $2 million from 1st Atlantic and SBM through a series of fraudulent transactions involving the skimming of money through overpayment schemes as well as fraudulent payments to companies Lawbaugh secretly controlled for services that were never rendered;" causing "material misrepresentations and omissions in numerous financial forms for SBM and 1st Atlantic, which forms were filed with the Commission and distributed to investors [and] overstated their respective assets and failed to disclosed both the fact and the financial impact of Lawbaugh's misappropriations;" and misappropriating "approximately $1 million from at least three investors by promising to invest their funds in 1st Atlantic face-amount certificates, but instead depositing those funds directly into his personal bank accounts" and then lulling the investors "by creating and disseminating fictitious account statements." Paper no. 1, at ¶¶ 18-20; see id. at ¶¶ 21-31.

Defendant also clearly violated sections 17(e)(1), 34(a), 34(b), and 37 of the Investment Company Act of 1940, 15 U.S.C. §§ 80a-17(e)(1), 80a-33(a), 80a-33(b), 80a-36. Section 17(e)(1) prohibits "any affiliated person of a registered investment company" from accepting "any compensation (other than a regular salary or wages from such registered company) for the purchase or sale of any property to or for such registered company or any controlled company thereof...." "Affiliated person[s]" include officers and directors, see 15 U.S.C. § 80a-2(a)(3), so Lawbaugh, as CEO of both 1st Atlantic and SBM, was an affiliated person. By "[f]unneling money to himself through the various companies he owned under the guise of loan origination and other fees" in connection with the purchase and sale of portfolio assets for the two companies, he violated section 17(e)(1)'s prohibition on accepting non-wage compensation for the purchase or sale of property. Paper no. 19, at 15; see paper no. 1, at ¶¶ 32-37.

Section 34(a), 15 U.S.C. § 80a-33(a), prohibits the destruction, mutilation, or alteration of any "account, book, or other document the preservation of which has been required pursuant to section 31(a)....." Rule 31(a) requires the preservation of the "accounts, books, and other documents relating to its business which constitutes the record forming the basis for financial statements required to be filed pursuant to Section 30 of the Investment Company Act." 17 C.F.R. § 270.31a-1(a). Rule 31a-1(b)(6) further requires an investment company to maintain a "record of all other portfolio purchase or sales...." 17 C.F.R. § 270.31a-1(b)(6). Defendant violated section 34(a) on at least one occasion by altering a purchase contract, adding $900,000 to the original contracted price. See paper no. 1, at ¶ 31.

Section 34(b), 15 U.S.C. § 80a-33(b), prohibits, in the same types of documents, "any untrue statement of a material fact" or the omission of any fact that results in the document being "materially misleading." Defendant violated section 34(b) by (1) by giving a fictitious letter, purporting to be from Prince George's County, to both SBM's accounting department and independent auditors, falsely stating the value of certain tax lien certificates; and (2) falsifying an HUD-1 Settlement Statement form regarding a loan transaction. See paper no. 1, at ¶¶ 28, 37.

Finally, Defendant violated section 37, 15 U.S.C. § 80a-36, which prohibits stealing, converting, or embezzling "any of the moneys, funds, securities, credits, property, or assets of any registered investment company." "Conversion may include misuse or abuse of property. It may reach use in an unauthorized manner or to an unauthorized extent of property placed in one's custody for limited use." Brown v. Bullock, 294 F.2d 415, 419 (2nd Cir.1961) (quoting Morissette v. United States, 1952, 342 U.S. 246, 272, 72 S.Ct. 240, 96 L.Ed. 288 (1952)). Here, Defendant violated section 37 by "caus [ing] 1st Atlantic and SBM to deposit funds into accounts he controlled and then misus[ing] those funds for his personal benefit." Paper no. 19, at 13; see paper no. 1, at ¶¶ 21-37. For example, Defendant caused 1st Atlantic and SBM to overpay vendors, and then directed the vendors to wire the overpayments to his personal accounts. See id. at ¶¶ 23, 29-30. On at least one occasion Defendant also authorized SBM to borrow money, but then diverted some of the loan amount to his...