Sec. & Exch. Comm'n v. KRM Servs.
| Decision Date | 26 August 2021 |
| Docket Number | CIVIL 1:19-cv-01424-RDA-MSN |
| Court | U.S. District Court — Eastern District of Virginia |
| Parties | SECURITIES & EXCHANGE COMMISSION, Plaintiff, v. KRM Services, LLC, et al. Defendants. |
REPORT AND RECOMMENDATION
This matter comes before the Court on plaintiff Securities and Exchange Commission's (“plaintiff” or “SEC”) Motion for Default Judgment (Dkt. No. 15). Having reviewed the record and the pleadings, the undersigned Magistrate Judge recommends entering default judgment in plaintiff's favor for the reasons that follow.
On November 8, 2019, plaintiff filed a Complaint in this Court alleging Unregistered Offer or Sale of Securities Violations (§ 5(a) and (c) of the Securities Act) and Misrepresentation and other Deceptive Acts (Securities Act § 17(a)(1)-(a)(3) & Exchange Act § 10(b) and Rule 10b-5(a)-(c)). (Dkt No. 1) at 10-12. On December 2 2019, plaintiff filed an affidavit of service, which reflected that a registered agent of KRM Services, LLC (“KRM”) had been served at its registered office in Florida on November 26, 2019. (Dkt. No. 7). KRM's response to the Complaint was due December 17, 2019. Plaintiff requested the Clerk of Court entry of default against KRM on January 24, 2020 (Dkt. No. 9), which was entered on January 27, 2020 (Dkt. No. 14).
On February 3, 2020, plaintiff filed its motion for default judgment against defendant KRM. (Dkt. No. 15). A hearing was held on February 21, 2020 where plaintiff appeared and no one appeared on behalf of defendant KRM. (Dkt. No. 19). The Court took the matter under advisement, as defendant Roberto Clark (“Clark”) had not yet been served. Following service of defendant Clark, the matter was removed from the Court's active docket pending settlement discussions and an active, parallel criminal proceeding. (Dkt. No. 31, 35). On September 11, 2020, plaintiff filed an amended memorandum in support of the motion for default judgment against KRM, which reduced the amount sought through disgorgement in accordance with the Supreme Court's decision in Liu v. SEC, 140 S.Ct. 1936 (2020). (Dkt. No. 32). Following numerous extensions, plaintiff and defendant Clark submitted a consent judgment to the Court on March 22, 2021 (Dkt. No. 44), which was granted on April 14, 2021 (Dkt. No. 46). The only remaining matter in this case is plaintiff's motion for default judgment against defendant KRM.
The following facts are established by plaintiff's Complaint (Dkt. No. 1) as well as by its memorandum in support of the motion for default judgment (Dkt. No. 16) and amendment to plaintiff's motion for default judgment. (Dkt. No. 32).
Defendant KRM is a Florida LLC incorporated by defendant Clark, its manager, founder, and majority owner, with principal places of business in Arlington, Virginia and Chevy Chase, Maryland. (Dkt. No. 1) at 2. Clark had authority over all decisions relating to the operation of KRM pursuant to the Operating agreement. Id. at 9. Clark's relevant actions were within the scope of his employment with KRM. Id. The Complaint alleges that Clark solicited loans for KRM and investments in unregistered securities, claiming that the funds were being used to market and develop a motorized surfboard known as the “Jetboard.” Id. at 1. Defendants claimed to hold the exclusive right to sell the Jetboard in the United States. Id. at 3. Defendant Clark, on behalf of KRM, met with investors and offered promissory notes and equity in KRM in exchange for investment in the company. Id. Defendants received approximately $350, 000 in investments in KRM securities through at least eighteen contracts for the sale of unregistered securities. Id. at 4-5. No. reasonable effort was made to ascertain whether these were accredited investors nor were the securities registered, as required by the Securities Act. Id.
The investments were secured through material misrepresentations by Clark, acting on behalf of KRM. Id. at 5. Clark represented that investment was needed to fulfil existing orders for the Jetboard, yet no such orders existed. Id. The Complaint identifies multiple instances of misrepresentations concerning existing orders and contracts with an international cruise line and rental companies. Id. at 5-6. These representations identified specific profits that KRM would make, which had no basis in the truth. Id. Defendants also produced fabricated purchase orders, misrepresented bank account statements, and referenced non-existent meetings. Id. at 7. These misrepresentations resulted in investments of approximately $350, 000. Id. at 6.
Clark used the investor funds for personal expenses, including at least $41, 000 spent at restaurants and bars, at least $19, 000 for hotels, at least $15, 000 paid to family members, at least $8, 000 to department and clothing stores, at least $5, 000 to convenience stores and gas stations, at least $3, 000 to grocery and liquor stores, at least $1, 000 to gyms, at least $1, 500 to spas and beauty salons at least $1, 000 to pet stores and groomers, at least $200 to a bail bondsman, and repayment to an earlier investor. Id. at 9. Defendant KRM has not disputed any of these facts.
A court must have both subject matter and personal jurisdiction over a defaulting defendant before it can render a default judgment. The Court has subject matter jurisdiction over this civil action under 28 U.S.C. § 1331 because the case raises questions of federal law under the Securities Act and the Exchange Act (15 U.S.C. §§ 77e(a) and (c), 77q(a), and 78j(b)). The Securities Act and the Exchange Act specifically provides that the district courts of the United States have subject matter jurisdiction over offenses relating to the Acts. 15 U.S.C §§ 77a, 77v(a), 78a, 78aa.
A court may exercise general or specific personal jurisdiction. “General personal jurisdiction requires ‘continuous and systemic' contacts with the forum state.” Perdue Foods LLC v. BRF S.A., 814 F.3d 185, 188 (4th Cir. 2016) (internal citations omitted). Because KRM has a principal place of business within this district, it is a citizen of this district and this Court has general personal jurisdiction. See, e.g., KMLLC Media, LLC v. Telemetry, Inc., 2015 WL 6506308, at *4 (E.D. Va. Oct. 27, 2015) ().
Venue is proper in this District pursuant to § 22(a) of the Securities Act, 15 U.S.C. § 77v, and § 27(a) of the Exchange Act, 15 U.S.C. § 78aa, because defendants offered and sold unregistered securities, met with clients, made misrepresentations and other deceptive acts, and made contracts with residents of this district.
Defendants were successfully served process of a summons and the Complaint by private process server to KRM's Florida registered agent on November 26, 2019. (Dkt. No. 7). This service is proper under Florida law and Fed.R.Civ.P. 4.
Default judgment is appropriate if the well-pleaded allegations of the complaint establish that the plaintiff is entitled to relief, and the defendant has failed to plead or defend within the time frame set out in the rules. Fed.R.Civ.P. 55; see also Agri-Supply Co. v. Agrisupply.com, 457 F.Supp.2d 660, 662 (E.D. Va. 2006). By defaulting, the defendant admits the plaintiff's well-pleaded allegations of fact, which then provide the basis for judgment. See Partington v. Am. Int'l Specialty Lines Ins. Co., 443 F.3d 334, 341 (4th Cir. 2006); Ryan v. Homecomings Fin. Network, 253 F.3d 778, 780 (4th Cir. 2001) (quoting Nishimatsu Constr. Co. v. Houston Nat'l Bank, 515 F.2d 1200, 1206 (5th Cir. 1975). Nevertheless, “‘[a] court confronted with a motion for default judgment is required to exercise sound judicial discretion in determining whether the judgment should be entered, and the moving party is not entitled to default judgment as a matter of right.'” ReadyCap Lending, LLC v. Servicemaster Prof'l Cleaning, Inc., 2016 WL 1714877, at *2 (E.D. Va. Apr. 12, 2016) (quoting EMI April Music, Inc. v. White, 618 F.Supp.2d 497, 505 (E.D. Va. 2009)). Here, because defendants have not answered or otherwise timely responded, the well-pleaded allegations of fact contained in the complaint are deemed to be admitted.
Plaintiff alleges that the defendants committed violations of the Security Act § 5(a) and (c), which prohibit selling or offering unregistered securities through the means and instrumentalities of interstate commerce. 15 U.S.C. § 77e(a), (c). A security is defined by the Act to include notes and investment contracts. 15 U.S.C. § 77b(a)(1). A contract, transaction or scheme is an investment contract whenever a “person [1] invests his money [2] in a common enterprise [3] and is led to expect profits solely from the efforts of the promoter or a third party. . . .” Bailey v. J.W.K. Prop., Inc., 904 F.2d 918, 920 (4th Cir. 1990) (citing SEC v. W.J. Howey Co., 328 U.S. 293 (1946)).
Here defendant Clark, on behalf of KRM, offered and sold promissory notes and interests in KRM. (Dkt. No. 1) at 3-5. Investors expected to make profits from their investments and had no meaningful control over the investment. Plaintiff asserts that investors were led to expect profits solely from KRM's efforts. Id. at 4. Therefore, the interests and notes were securities. These securities were not registered, as the Security Act requires, and were not exempt from the registration requirements. Id. KRM had offices in Maryland and Virginia and made sales and offers through email, text, and phone conversations...
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