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SECURITIES AND EXCHANGE COMMISSION v. ALEXANDER

June 28, 2004.

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
ADRIAN A. ALEXANDER, et al., Defendants.



The opinion of the court was delivered by: LAURA TAYLOR SWAIN, District Judge

OPINION

This matter, in which Plaintiff Securities and Exchange Commission ("SEC") seeks injunctive and monetary relief in connection with alleged insider trading, comes before the Court on the SEC's contested motions for default judgments against Defendant Constantine Spyropoulos ("Spyropoulos") and Defendants Jacobus J. Lam, Potenza Investments, Inc., Westcliff Partners, and Quintillion, B.V. ("Lam Defendants") pursuant to Rule 55(b) of the Federal Rules of Civil Procedure. Spyropoulos failed to comply with the Court's May 16, 2003, Order setting aside his previous default in this matter, and requiring him to serve and file a response to the Complaint within thirty days of the date of the Order. The Lam Defendants failed to comply with the Court's April 15, 2003, Order granting the application of Jones, Day, Reavis & Pogue ("Jones Day") to withdraw as counsel for the Lam Defendants, which Order directed each of the Lam Defendants to cause a notice of appearance to be served and filed by new counsel (except in the case of individual Defendant Jacobus J. Lam, who was advised that he could appear pro se) within sixty days of the date of the Order.

  The SEC seeks a permanent injunction restraining Spyropoulos from committing future violations of the federal securities laws, and a judgment requiring Spyropoulos to disgorge his alleged illegal trading profits in the amount of $114,150, as well as pay prejudgment interest in the amount of $107,434.93 and a civil monetary penalty of $342,450 (three times the profit gained from the allegedly illegal trade of securities). As to the Lam Defendants, the SEC seeks a judgment granting a permanent injunction restraining them from committing future violations of the federal securities laws, and requiring the Lam Defendants to pay a civil monetary penalty of up to three times the total allegedly illegal trading profit made by each of the Lam Defendants. The Court has considered thoroughly all of the parties' submissions related to the instant motions. For the following reasons, Plaintiff's motions are granted. Spyropoulos and the Lam Defendants will be permanently enjoined from committing future violations of the federal securities laws. The Court will defer determinations as to monetary relief pending an opportunity for Spyropoulos and the Lam Defendants to make further submissions in response to the evidence proffered by the SEC in support of its claims for disgorgement, interest and penalties.

  BACKGROUND*fn1

  The SEC filed the instant action on September 27, 2000, asserting claims for disgorgement, penalties and injunctive relief against multiple defendants, including Spyropoulos, Spyropoulos's wife Penelope Afouxenide ("Afouxenide") and the Lam Defendants, based upon allegations of unlawful insider trading of securities in violation of Section 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act") (15 U.S.C.A. § 78j(b) (West 2004)), and Rule 10b-5 (17 C.F.R. § 240.10b-5 (2002)) promulgated thereunder, and Section 14(e) of the Exchange Act (15 U.S.C. § 78n(e) (West 1997)) and Rule 14e-3 (17 C.F.R. § 240.14e-3 (2002) promulgated thereunder.

  Spyropoulos

  Spyropoulos, who resides in Greece, is a citizen of both Greece and the United States. (Declaration of Charles Stodghill, dated September 29, 2003 ("9/29/03 Stodghill Decl.") ¶¶ 2, 3; Exs. 1, 2 at 27; Spyropoulos Aff. in Supp. of Motion for Order Setting Aside Entry of Default at ¶ 1.) Spyropoulos is a well-educated international businessman who holds a Bachelors Degree in Mechanical Engineering from NYU, a Masters Degree in Applied Mechanics from California Institute of Technology and a Masters in Business Administration from UCLA. (9/29/03 Stodghill Decl. ¶ 3; Ex. 2 at 4-5; 9/29/03 Stodghill Decl. ¶ 5; Ex. 4 at 28-29.)

  The SEC alleges that Defendant Susi Belli ("Belli"), a former employee of Luxottica S.p.A. ("Luxottica"), passed material nonpublic information concerning Luxottica's plans to acquire U.S. Shoe Corporation ("U.S. Shoe") to Defendant Adrian Alexander ("Alexander"), who, in turn, shared this information with a number of friends and/or associates, including Spyropoulos. The SEC further alleges that Spyropoulos used the information to make illegal purchases of U.S. Shoe securities prior to Luxottica's public announcement of its hostile tender offer for U.S. Shoe.

  On December 22, 2000, the SEC served Spyropoulos and Afouxenide with copies of the Summons and Complaint in accordance with Greek law by causing a bailiff to post said documents on the front door of their residence. (9/29/03 Stodghill Decl. ¶ 6, Ex. 5.) Spyropoulos failed to timely respond to the Complaint. On August 8, 2001, the SEC requested permission from the Court to file a motion for a default judgment. On that same day, the Court issued an Order granting the SEC's request, which was served upon Spyropoulos and Afouxenide on or about September 14, 2001. (9/29/03 Stodghill Decl. ¶ 8, Ex. 7.) The SEC, however, did not file a motion for default judgment, and, on August 9, 2002, Spyropoulos and Afouxenide, through their retained counsel, filed a motion for an order setting aside the entry of default against both defendants and dismissing the actions as to Spyropoulos and Afouxenide for lack of personal jurisdiction. By order dated May 16, 2003, the Court granted the motion to set aside the entry of default against both defendants, granted the motion to dismiss as to Afouxenide and denied the motion to dismiss as to Spyropoulos. The Court also directed Spyropoulos to serve and file his response to the Complaint within thirty days of the date of the order.

  Spyropoulos did not respond to the Complaint within the time frame prescribed in the Court's May 16th Order, and on July 14, 2003, the SEC again requested the Court's permission to make a motion for a default judgment as to Spyropoulos. The Court issued an order granting the SEC's request on July 22, 2003, and directing the SEC to serve the order on Spyropoulos's counsel. Although a certificate of service is not listed on the court docket, Plaintiff has proffered evidence that the order was served on Spyropoulos's counsel as of July 31, 2003, and that an attempt was made to file a certificate of service. On July 23, 2003, Spyropoulos's counsel, the Law Offices of Bradley D. Simon, moved to withdraw, citing increasing difficulties in communication between the firm and Spyropoulos, proffering a copy of a letter from Spyropoulos discharging the firm and indicating that Spyropoulos had insufficient funds to continue paying a law firm and, therefore, intended to proceed pro se from that point forward. On August 12, 2003, the Court issued an order permitting the Law Office of Bradley D. Simon to withdraw following its filing of a certificate of service of the order on Spyropoulos and all counsel of record in this case, and directing Spyropoulos to file a notice of appearance either pro se or by new counsel within 45 days of the date of the order. The Law Offices of Bradley D. Simon did not file the Certificate of Service until October 9, 2003, indicating that they had mailed the order to Spyropoulos on October 3, 2003. The SEC filed the instant motion seeking a default judgment as to Spyropoulos, including a Certificate of Service, on September 30, 2003.

  The Lam Defendants

  Jacobus J. Lam ("Lam") is a Dutch national residing in the Netherlands. (Declaration of Charles Stodghill, dated October 15, 2003 ("10/15/03 Stodghill Decl.") ¶ 2, Ex. 1.) Lam is a chartered accountant, and served as the Managing Director of Defendant Quintillion B.V., a Dutch corporation, an officer of Defendant Potenza Investments, Inc., a Panamian corporation based in the Netherlands, and the President of Defendant Westcliff Partners, a Dutch corporation. (Id.)

  The SEC alleges that Alexander, either on his own or through Patrick J. Rooney ("Rooney"), disseminated the inside information he received from Belli to Lam, who, in turn, acting through accounts in the names of the aforementioned companies, used the information to make illegal purchases of U.S. Shoe securities before the public announcement of Luxottica's hostile tender offer for U.S. Shoe.

  The Lam Defendants answered the SEC's Complaint on March 15, 2001. On September 5, 2002, Jones Day, the attorneys of record for the Lam Defendants, filed a motion for an order permitting them to withdraw as counsel for the Lam Defendants based upon the Lam Defendants' alleged failure and refusal to communicate and cooperate despite repeated attempts by Jones Day over the course of a year "to discuss matters such as settlement, strategy, the clients' objectives, the need to respond to discovery and the need to schedule and appear at proposed depositions." (Aff. of Lee A. Armstrong at ¶ 4.) The Court issued an order granting Jones Day's motion to withdraw on April 15, 2003. In that order, the Court directed each of the Lam Defendants to cause a notice of appearance to be filed by new counsel, or, in the case of Lam, either by new counsel or pro se, within 60 days of the date of the order. The order also warned that failure to comply could result in the Court entering a default judgment. The order further directed Jones Day to serve copies of the order upon the Lam Defendants within five days of the date of the order. Jones Day filed an affidavit of service on April 16, 2003, indicating that the order was served on the Lam Defendants by fax and Federal Express on that same date. None of the Lam Defendants filed a notice of appearance in a timely fashion, and the SEC requested permission to file a motion for a default judgment via letter to the Court, dated July 10, 2003, and copied to the Lam Defendants. (10/15/03 Stodghill Decl. ¶ 6, Ex. 5.) The Court issued an order granting the SEC permission to move for a default judgment on July 22, 2003, which the SEC served on the Lam Defendants via Federal Express on July 31, 2003. (Id. at ¶ 7, Ex. 6.) The SEC filed the instant motion seeking a default judgment against the Lam Defendants on October 15, 2003.

  DISCUSSION

  Opposition to a motion for a default judgment is evaluated under the same "good cause shown" standard that is used to evaluate motions to set aside an entry of default pursuant to Fed.R.Civ.P. 55(c). Commerical Bank of Kuwait v. Rafidain Bank, 15 F.3d 238, 243 (2d Cir. 1994). Courts evaluate whether "good cause" exists to deny the motion by considering the following factors: 1) whether the default was willful; 2) whether the defendant has presented any meritorious defenses to the plaintiff's claims; and 3) whether, and to what extent, the non-defaulting party would be prejudiced by the denial of the motion for a default judgment Id. American Alliance Ins. Co., Ltd. v. Eagle Ins. Co., 92 F.3d 57, 59 (2d Cir. 1996); SEC v. McNulty, 137 F.3d 732, 738 (2d Cir. 1998). Dispositions of motions for default judgments are "left to the sound discretion of the district court." Shah v. New York State Dep't of Civil Service, 168 F.3d 610, 615 (2d Cir. 1999) (internal quotation marks and citation omitted.)

  The Second Circuit has determined that "[s]trong public policy favors resolving disputes on the merits" rather than through default judgments. American Alliance, 62 F.3d at 61; Shah, 168 F.3d at 615. "[B]ecause defaults are generally disfavored and are reserved for rare occasions, when doubt exists as to whether a default should be granted or vacated, the doubt should be resolved in favor of the defaulting party." Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 96 (2d Cir. 1993). "A default judgment is by its nature an extreme sanction, and `such extreme measures should be reserved by a trial court as a final, not a first, sanction imposed on a litigant.'" Tellock v. Davis, No. 02 CV 4311 (FB), 2003 WL 22999199, at * 1 (S.D.N.Y Dec. 17, 2003) (quoting Enron Oil Corp., 10 F.3d at 92)). That said, "courts also have a competing `interest in expediting litigation' and consequently in preventing `abuses of process . . . by enforcing those ...


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