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Securities and Exchange Commission v. One or More Unknown Traders in the Common Stock of Certain Issuers

October 2, 2009


The opinion of the court was delivered by: Matsumoto, United States District Judge


Pending before the court is plaintiff Securities and Exchange Commission's ("SEC" or "plaintiff") motion for default judgment seeking: (1) a permanent injunction barring defendants One or More Unknown Traders in the Common Stock of Certain Issuers (a/k/a AWE Trading, Inc. and Andrew Andersen) ("defendants" or "unknown traders") from future violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, promulgated thereunder, 17 C.F.R. § 10b-5, and (2) disgorgement of defendants' profits acquired while perpetuating the fraudulent scheme. (See Mot. for Default J. at 3.) For the reasons set forth herein, plaintiff's motion for default judgment is granted in part and denied in part.


A. Procedural History

Plaintiff commenced this action on April 7, 2008, alleging violations of Section 10(b) and Rule 10b-5 seeking (1) a permanent injunction barring defendants from future violations of Section 10(b) and Rule 10b-5 and (2) disgorgement of defendants' ill-gotten gains.*fn1 (Compl. at 14.) Plaintiff also named as a "relief defendant" Interactive Brokers LLC ("Interactive" or "Relief Defendant"), a broker-dealer registered with the SEC that detected suspicious activity, suspended that activity and froze all funds in defendants' profiting accounts. (Compl. ¶¶ 12-13.) The Relief Defendant was dismissed voluntarily on December 30, 2008. (Doc. No. 30.) Due to the inability to identify and locate individuals associated with the defendants who used the internet to conduct repatriation of all assets, and civil penalties business, plaintiff requested authorization to serve unknown traders by alternative means, pursuant to Federal Rule of Civil Procedure 4(f)(3). The court granted plaintiff's request on June 18, 2008. (Doc. No. 5, Mot. for Service by Pub.; Doc. No. 11, Order Granting Mot. for Service by Pub.) By September 19, 2009, plaintiff had successfully served defendants through alternative means, including email, facsimile, and publication, independently and with assistance from Relief Defendant. (See Doc. No. 20, Not. by SEC re. Order on Mot. for Service by Pub.) Defendants have failed to answer or move with respect to the complaint, despite being served with process in the aforementioned ways. On September 23, 2008, the SEC filed a motion for entry of clerk's default against unknown traders for neglecting to answer or otherwise respond to plaintiff's complaint.

On September 24, 2008, the court granted plaintiff's motion for entry of clerk's default and, on September 30, 2008, granted plaintiff ninety days to seek a default judgment and apermanent injunction against the defendants and disgorgement equal to the amount of deposits that the Relief Defendant deposited into the Court Registry pursuant to the court's order to turnover funds. (See Order Granting Mot. for Entry of Default dated September 24, 2008; Order granting Mot. to Release and Turnover Funds dated September 24, 2008; Order Granting Request for 90 days to file Mot. for Default J. dated September 30, 2008.) On October 10, 2008, the clerk entered default with respect to the unknown traders. (See Clerk's Entry of Default dated October 10, 2008.) On December 30, 2008, plaintiff filed its Memorandum of Law in support of its motion for default judgment against defendants One or More Unkown Traders in the Common Stock of Certain Issues (a/k/a AWE Trading, Inc. and Andrew Andersen) (see Doc. No. 29, Motion for Default Judgment) and voluntarily dismissed all claims with prejudice against Relief Defendant (see Doc. No. 30, Not. of Voluntary Dismissal).

B. Allegations in the Complaint

The complaint alleges that defendants engaged in a sophisticated internet securities trading scheme involving invasion of brokerage accounts, identity misappropriation and fabrication, and a calculated series of trades amounting to defendants' realization of a substantial profit. The scheme began in February 2007 when defendants posted a job listing for a position at AWE, a fictitious Latvian brokerage firm, on a classifieds website, (See Compl. ¶ 2--3.)

Defendants requested applicants' "dates of birth, social security numbers, and other personal information" to purportedly "perform a background check," but instead, used this information to open four separate brokerage accounts ("profiting accounts") at Interactive without the knowledge or authorization of those responding to the posting ("intermediaries"). (Compl. ¶ 3, 15-- 16.) The profiting accounts were set up over a two month period, one on February 15, 2007, another on March 30, 2007, one on April 10, 2007, and another on April 18, 2007. (Compl. ¶¶ 28, 35, 41, 49.) Using the four intermediaries, defendants wired various amounts of money to the intermediaries' personal accounts and subsequently instructed the intermediaries to wire transfer the funds from their personal accounts to specific account numbers at Interactive which corresponded to the profiting accounts opened in the intermediaries' names. (Compl. ¶ 17--18.) The defendants then gained unauthorized access to other online brokerage accounts owned by innocent third-parties ("victim accounts"), and orchestrated a series of quick, well-timed purchases and sales of "thinly-traded securities" from the victim accounts to the profiting accounts. (Compl. ¶¶ 3, 19, 21--23.) The purchases made from the victim accounts increased the trading volume and the market price of specifically targeted securities, resulting in a loss to the victim accounts and a profit of more than $66,000 that defendants realized upon sale of those same securities in the profiting accounts. (Compl. ¶ 21.) Defendants also profited through purchases at increasingly higher prices of targeted securities in the victim accounts and then immediately sold the targeted securities short in the profiting accounts, causing share prices in the victim accounts to decrease due to a cessation of purchases in the victim accounts. (Compl. ¶ 24.) Defendants continued this scheme until April 2007, when Interactive "became suspicious of the trading in the [p]rofiting [a]ccounts and suspended all activity . . . ." (Compl. ¶ 4.)


A. Default Judgment Standard

Rule 55(b) of the Federal Rules of Civil Procedure provides that when a party moves for judgment against an adverse party who has failed to answer or otherwise appear in the action, the court may enter judgment against the defaulting party. See Fed. R. Civ. P. 55(b). A party's default constitutes an admission of the well-pleaded factual allegations in the complaint, except as to claims relating to damages. See Greyhound Exhibitgroup, Inc. v. E.L.U.L Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992); Au Bon Pain Corp., v. Artect, Inc., 653 F.2d 61, 65 (2d Cir. 1981). Moreover, damages inquest by exhibits and affidavits, without an in-person hearing, may be conducted as long as the court can ensure "a basis for the damages specified in the default judgment." Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 111 (2d Cir. 1997) (quoting Fustok v. ContiCommodity Servs., Inc., 873 F.2d 38, 40 (2d Cir. 1989)).

Plaintiff has properly moved for default judgment against defendants. Thus, the court proceeds to assess the defendants' liability under Section 10(b) and Rule 10b-5, as well as plaintiff's requested relief.

B. Defendants' Liability for Violations of Section 10(b) of the Exchange Act and Rule 10b-5 of the ...

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