U.S. Sec. & Exch. Comm'n v. Wilson
| Decision Date | 28 December 2022 |
| Docket Number | Civil Action 4:22-cv-00741-O |
| Parties | U.S. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. JOHN C. WILSON, II and AETHER INNOVATIVE TECHNOLOGY INC., Defendants. |
| Court | U.S. District Court — Northern District of Texas |
Before the Court is the Motion for Final Judgment by Default filed by the United States Securities and Exchange Commission (“SEC”) on October 31, 2022. ECF No. 15. Under Federal Rule of Civil Procedure 55(b), the SEC moves this Court for a permanent injunction by default against John C Wilson, II (“Wilson”) and Aether Innovative Technology, Inc. (“Aether”) (collectively “Defendants”). United States District Judge Reed O'Connor referred the Motion and related briefing to the undersigned pursuant to 28 U.S.C. § 636. ECF No. 17. Having considered the Motion and applicable legal authorities, the undersigned RECOMMENDS that Judge O'Connor GRANT the Motion (ECF No 15) and ENTER DEFAULT JUDGMENT on the SEC's claims against Wilson and Aether.
According to the SEC's pleadings, Wilson co-founded a company named Aether Network Technology, Inc (“ANT”) with a business partner in February 2019. ECF No. 15 at 10. ANT's business plan was to collect cellular transmission data, process it, and then sell the processed data to customers, including telecommunications providers, cell tower companies, and first responders, who could use the data to optimize their own operations. Id. ANT intended to form a joint venture named Clearsite LLC (“Clearsite”), with a joint-venture partner to operate a network of “nodes” (individual equipment units placed on or near cell towers to collect cellular data). Id. Revenue from the data sales was to be divided between ANT and the joint-venture partner. Id. ANT received approximately $20,000 from outside investors, and Wilson claimed to have used his personal funds to pay some of ANT's expenses. Id. Wilson subsequently misappropriated Aether investor assets to reimburse himself for the expenses he incurred on behalf of ANT. Id.
Around July 2019, before ANT and the joint-venture partner could form Clearsite, Wilson had a falling out with his ANT business partner, resigned in an attempt to remove his business partner from the business, and formed Aether, a technology company based in Keller, Texas. Id. at 11. The joint venture partner severed its relationship with ANT and formed a new relationship with Aether. Id. Aether's and ANT's business models were identical. Id.
From August 2019 through September 2020, Defendants defrauded fifteen investors out of approximately $1.9 million. Id. at 10. To obtain this money, Defendants misrepresented (1) the number of prior and committed investors and their representative financial commitments in Aether, (2) the use of investor assets, (3) the deployment of the hardware to be used in Aether's primary business, and (4) the existence of a significant customer relationship, including with a cell tower company (“Company A”). Id. at 10-11. Wilson also misappropriated at least $122,850 for his personal benefit and deceptively attempted to conceal his fraud from Aether personnel and investors. Id. at 11. Defendants made these alleged misrepresentations with the scienter required under the Antifraud Provisions of the Securities Act and the Exchange Act, and the misrepresentations were material to the defrauded investors' decisions to invest in Aether. Id. at 10; 15 U.S.C. 77q(a)(1)-(3); 17 C.F.R. 240.10b-5.
The SEC filed this lawsuit on August 23, 2022. ECF No. 1. Defendants were properly served on August 25, 2022, and Notice of Service of Process was filed with the Court on September 1, 2022. ECF No. 7. Thereafter the Clerk entered default against Defendants on October 5, 2022. ECF No. 10. A sworn Declaration by Gregory Miller of the SEC proves that Wilson is not an infant, incapacitated person, or in military service. ECF No. 9-1 at 2. In September, Wilson telephoned the SEC office on more than one occasion sharing plans to answer the complaint and to file a request for extension of time with the Court. ECF No. 9-1 at 2-3. The SEC indicated that it would not oppose such a request. ECF Nos. 9 at 2; 9-1 at 2.
When neither of the Defendants responded to its complaint and the Court ordered it to file the Motion for Default on or before October 31, 2022, the SEC filed the pending Motion. Id. at 3. The Motion includes a Declaration and Amended Declaration proving facts against the Defendants. ECF Nos. 15, 16. To date, neither Wilson nor Aether has filed a response to the Motion.
Federal Rule of Civil Procedure 55 governs the entry of default and default judgment. There are three stages to entry of default judgment. First, a default occurs “when a defendant has failed to plead or otherwise respond to the complaint within the time required by the Federal Rules.” N.Y. Life Ins. Co. v. Brown, 84 F.3d 137, 141 (5th Cir. 1996); see also Fed.R.Civ.P. 55(a) (). Second, the Clerk may then enter a defendant's default if it is “established by affidavit or otherwise.” Brown, 84 F.3d at 141 (citing Fed.R.Civ.P. 55(a)). Third, if the Clerk enters default, the plaintiff must apply for a default judgment from the Court. Fed.R.Civ.P. 55(b)(2). The Court may not enter default judgment against an individual in military service until an attorney is appointed to represent the defendant. 50 U.S.C. § 3931.
However, “[a] party is not entitled to a default judgment as a matter of right, even where the defendant is technically in default.” Lewis v. Lynn, 236 F.3d 766, 767 (5th Cir. 2001). Rather, courts retain ultimate discretion to grant or deny default judgments. Lindsey v. Prive Corp., 161 F.3d 886, 893 (5th Cir. 1998). The Fifth Circuit has “adopted a policy in favor of resolving cases on their merits and against the use of default judgments,” although this policy is “counterbalanced by considerations of social goals, justice and expediency, a weighing process . . . within the domain of the trial judge's discretion.” In re Chinese-Manufactured Drywall Prods. Liab. Litig., 742 F.3d 576, 594 (5th Cir. 2014) (quoting Rogers v. Hartford Life & Accident Ins. Co., 167 F.3d 933, 936 (5th Cir. 1999)). Default judgment remains “a drastic remedy, not favored by the Federal Rules.” Sun Bank of Ocala v. Pelican Homestead & Sav. Ass'n, 874 F.2d 274, 276 (5th Cir. 1989).
Courts use a three-pronged analysis to determine if default judgment is appropriate. J & J Sports Prods., Inc. v. Morelia Mex. Rest., Inc., 126 F.Supp.3d 809, 813 (N.D. Tex. 2015). First, they ask if default judgment is procedurally warranted. See Lindsey, 161 F.3d at 893. Second, they analyze the substantive merits of the plaintiff's claims and determine if the pleadings establish a sufficient basis for default judgment. Nishimatsu Constr. Co. v. Hous. Nat'l Bank, 515 F.2d 1200, 1206 (5th Cir. 1975). Third, they determine what form of relief, if any, the plaintiff should receive. Morelia, 126 F.Supp.3d at 814.
The Clerk entered Defendants' default (ECF No. 10), and the Court now must determine if default judgment is appropriate. Lewis, 236 F.3d at 767. To do so, the undersigned applies the three-pronged inquiry. See Morelia, 126 F.Supp.3d at 813.
Under Lindsey, courts look to six factors to determine whether a default judgment is procedurally warranted. See Lindsey 161 F.3d at 893. The Court will consider whether: (1) material issues of fact exist; (2) there has been substantial prejudice; (3) the grounds for default are clearly established; (4) the default was caused by a good faith mistake or excusable neglect; (5) default judgment would be too harsh; and (6) the court would be obliged to set aside the default upon motion from the defendant. Id. All six of the Lindsey factors support default judgment for the SEC.
No material issues of fact remain concerning Defendants' knowing and material misrepresentations to investors. Defendants have not filed any responsive pleadings, no material facts are in dispute, and the Court may take the SEC's pleadings as true. See id.; Nishimatsu, 515 F.2d at 1206 (). The first Lindsey prong favors default judgment.
Similarly, nothing in the record suggests any “substantial prejudice” towards Defendants that would undermine the SEC's entitlement to default judgment. See Lindsey, 161 F.3d at 893. Defendants were properly served with the complaint and given ample time and opportunity to respond in this matter. See ECF Nos. 5,6. Therefore, Lindsey's second prong also favors default judgment.
The grounds for default in this case were clearly established and nothing in this record indicates the default is due to a “good faith mistake or excusable neglect.” See Lindsey, 161 F.3d at 893.
Process was properly served and executed upon Defendants on August 25, 2022, and Notice of Service of Process was filed with the Court on September 1, 2022. ECF No. 7. The SEC's declaration recounts some communications between the parties, but it has been three months since the referenced telephone and email exchanges. See ECF No. 9-1. Despite being afforded multiple opportunities and reasonable time to respond to the SEC's lawsuit, Defendants have failed to respond to the SEC's complaint or file any other pleadings explaining their unresponsiveness. Therefore, the third and fourth Lindsey prongs favor default.
Additionally default judgment against Defendants would not be too harsh a remedy...
To continue reading
Request your trial