Sec. & Exch. Comm'n v. Kay X. Yang

• Decision Date: 26 April 2023
• Docket Number: 22-CV-450-JPS
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. KAY X. YANG, XAPPHIRE LLC, and CHAO YANG, Defendants.
• Court: U.S. District Court — Eastern District of Wisconsin

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SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. KAY X. YANG, XAPPHIRE LLC, and CHAO YANG, Defendants.

No. 22-CV-450-JPS

United States District Court, E.D. Wisconsin

April 26, 2023

ORDER

J.P Stadtmueller U.S. District Judge.

1. PROCEDURAL BACKGROUND

On April 13, 2022, Plaintiff Securities and Exchange Commission (the “SEC” or the “Commission”) filed this action, alleging a variety of securities fraud claims against Defendants Kay X. Yang (“Kay”) and Xapphire LLC (“Xapphire”), and a claim related to possession of allegedly ill-gotten funds against Relief Defendant Chao Yang (“Chao”) (together with Kay and Xapphire, “Defendants”). ECF No. 1. On April 27, 2022, the SEC filed an amended complaint containing the same factual allegations. ECF No. 4. Xapphire was served with the amended complaint through its registered agent on May 5 2022; Kay and Chao were personally served with the amended complaint on May 7, 2022. ECF Nos. 8-10. Consequently, Xapphire's response to the amended complaint was due on May 26, 2022 and Kay's and Chao's response to the amended complaint was due on May 31, 2022. Fed.R.Civ.P. 12(a)(1)(A)(i). On June 23, 2022, having received no response to the amended complaint from any of the Defendants, the SEC requested entry of default. ECF No. 13. The Clerk of Court entered default on June 24, 2022.

Thereafter, on June 27, 2022, July 15, 2022, July 19, 2022, and July 21, 2022, Kay and Chao filed, pro se, a variety of notices and affidavits. ECF Nos. 14-15, 18-21. The Court granted the SEC's motion to strike these filings, finding them unauthorized under the Federal and Local Rules, irrelevant, and prejudicial to the SEC. ECF No. 23. The Court also denied a “Motion for Release and Full Settlement,” filed by Defendants on July 12, 2022, ECF No. 16, because, like the notices and affidavits, it was an unauthorized filing and irrelevant. Specifically, the document was not a proper responsive pleading in this action, nor was it a motion to set aside default. ECF No. 23 at 3. Because Defendants were in default, the Court granted them until August 12, 2022 “to file an appropriate motion to set aside the Clerk of Court's entry of default, taking care to demonstrate to the Court why ‘good cause' exists therefor.” ECF No. 23 at 3.

Following that order, Kay and/or Chao filed: (1) two motions to dismiss, ECF Nos. 24, 26; (2) a letter requesting that the Court sign an IRS Form 56 “in order to continue to do business” with Kay and Chao and requesting payment from the Court, ECF No. 25; (3) copies of UCC Financing Statements naming as “debtors-in-possession” the SEC, the SEC's attorneys, the Commodity Futures Trading Commission (the “CFTC”), the CFTC's attorneys, the Department of the Treasury, the FBI, a federal agent, the United States District Court for the Eastern District of Wisconsin, and this Judge as well as Magistrate Judge Nancy Joseph (both listed at the address of the federal courthouse), ECF Nos. 28, 29; (4) documents titled “Proof of Claim for Internal Revenue Taxes” stating that the Seventh Circuit and the SEC are indebted to the United States in the amount of $16.5 million, ECF Nos. 31, 32; (5) a letter from Kay to the SEC informing the SEC that its “fraudulent[]” and “false” claim is “adjourned,” and requesting a “full accounting relating in any way to . . . [the SEC's] intrusion” upon Kay, ECF No. 33; (6) a motion to set aside default, ECF No. 34; and (7) a counterclaim against the SEC, ECF No. 39.

On December 19, 2022, the Court issued an order that, among other things, denied the motions to dismiss, struck many of the above-listed filings, denied the motion to set aside default, and dismissed the counterclaim. ECF No. 40. As to the motions to dismiss, the Court held that they were both untimely and frivolous:

The first motion to dismiss questions the Court's status as a government agency, speculates that the Court “must be a business, must be a bank” because the Court employs a clerk, and attributes “dishonor” to the Court for denying Defendants' prior unauthorized filings. ECF No. 24 at 2. It does not address at all the substantive merits of this case- that is, that Defendants allegedly violated securities laws[.]

The second motion to dismiss requests that the case be dismissed for the SEC's failure to respond to Kay's and Chao's first motion to dismiss within 10 days. ECF No. 26 at 1-2 . . . . Civil Local Rule 7(b) provides that a non-moving party has 21 days to respond to a motion to dismiss. Kay and Chao may not unilaterally adjust that date.

Id. at 8-9. With respect to the above-listed filings, the Court found that “[a]s with the documents subject to the Court's [prior order], the documents are not authorized filings (which, at this juncture, would only have been a motion to set aside default [. . .]), they are irrelevant, and they are prejudicial to the SEC.” Id. at 4.

The Court determined that the motion to set aside default failed to meet the Rule 55(c) standard to do so:

[O]n October 18, 2022, Kay filed a document appropriately titled “Motion to Set Aside Default,” and accompanied the filing with an affidavit ..... First, Kay avers that she was never served with the complaint and is unsure who the plaintiff is because the SEC “is an entity [and] has no contracts with Kay Yang.” Second, Kay contends that the complaint fails to provide her notice of the factual allegations against her .... Third, Kay contends that default was improperly entered because the SEC supported its motion for entry of default with a declaration in lieu of an affidavit.

The SEC submitted proof of personal service on Kay at her residence, which residence is the same return address Kay uses on all her filings with the Court .... “A signed return of service constitutes prima facie evidence of valid service which can be overcome only by strong and convincing evidence.” Tate v. Milwaukee Cnty. Jail, No. 06-C-670, 2008 WL 4501513, at *3 (E.D. Wis. Sept. 30, 2008). Kay has offered no such evidence.

That Kay believes the complaint does not sufficiently describe the allegations also does not demonstrate good cause to set aside default; Kay could have appeared and timely presented that defense under Rule 12. She did not. Finally, an attorney declaration constitutes a showing “by affidavit or otherwise” within the meaning of Rule 55(a) .... Even if it did not, such an argument would not provide a basis to support a failure to timely defend, given that Kay was served with this lawsuit on May 7, 2022, but did not begin filing anything in this case until June 27, 2022 (notwithstanding that the June and July 2022 filings have, by and large, all been struck as unauthorized, irrelevant, or prejudicial). The Court will deny Kay's motion to set aside default, and the Clerk's June 24, 2022 entry of default against Defendants will stand.

Id. at 10-11 (some internal citations omitted). Finally, the counterclaim was dismissed as barred by Section 21(g) of the Exchange Act of 1934, 15 U.S.C. § 78u(g). Id. at 11.

Now before the Court is the SEC's motion for default judgment. ECF No. 45. Neither Kay, Chao, nor Xapphire has filed an opposition to the motion, despite having been served with it by U.S. mail and email, ECF No. 45 at 2, as well as having been served by U.S. mail with the Court's orders setting the briefing schedule for the motion, ECF Nos. 40, 42. See Fed.R.Civ.P. 5(b) (explaining proper forms of service of process); Fed.R.Civ.P. 55(b)(2) (service requirement). The Court therefore treats the motion as unopposed. Civ. L.R. 7(b), (d). For the reasons set forth herein, the motion will be granted. Further, as explained below, the SEC has established Defendants' liability and proven up damages. The SEC has demonstrated its entitlement to equitable relief, including a permanent injunction and disgorgement. The SEC has also demonstrated its entitlement to a civil penalty, and that the amount of such a penalty is ascertainable with certainty from the SEC's filings, including a detailed affidavit. Therefore, judgment by default will be entered accordingly.

2. LEGAL STANDARD

Upon entry of default, “the well-pleaded allegations of a complaint relating to liability are taken as true.” VLM Food Trading Int'l., Inc. v. Ill. Trading Co., 811 F.3d 247, 255 (7th Cir. 2016) (internal citation and quotation marks omitted). “Accepting those facts as true, a court must determine whether those facts establish that the plaintiff is entitled to the relief it seeks.” Cree, Inc. v. BHP Energy Mex. S. de R.L. de C.V., 335 F.Supp.3d 1105, 1111 (E.D. Wis. 2018) (internal citation omitted). If they do, the Court may, in its discretion, grant default judgment to the movant. See Domanus v. Lewicki, 742 F.3d 290, 301 (7th Cir. 2014).

Even if default judgment is granted, a plaintiff nevertheless bears the responsibility to prove up its damages under Rule 55(b)(2) of the Federal Rules of Civil Procedure. Indeed, “even when a default judgment is warranted based on a party's failure to defend, the allegations in the complaint with respect to the amount of the damages are not deemed true,” and the Court must conduct an inquiry to ascertain the amount of damages with reasonable certainty. e360 Insight v. The Spamhaus Project, 500 F.3d 594, 602 (7th Cir. 2007) (citations and quotations omitted). Judgment by default may not be entered without a hearing on damages unless “the amount claimed is liquidated or capable of ascertainment from definite figures contained in the documentary evidence or in detailed affidavits.” Id. (citation omitted). Judgment by default may also include an award of equitable relief, including the entry of a permanent injunction, where the party seeking such relief demonstrates its entitlement thereto. Id. at 604.

3. FACTS IN THE...