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Securities and Exchange Commission v. Christopher W. Bass

September 14, 2011




Plaintiff Securities and Exchange Commission ("SEC" or "Plaintiff") brought this action against Defendants alleging violations of §§ 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act"); and of § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"). Complaint (Dkt. No. 1) ¶ 6. After application by the SEC, the Clerk of the Court executed Certificates of Default against each Defendant on October 6, 2010. Entry of Default (Dkt. No. 9). The SEC now seeks partial default judgments against Defendants enjoining them from further violations of federal securities laws. See Motion for default judgment (Dkt. No. 10) ("Motion"). The SEC also requests leave to seek disgorgement, prejudgment interest, and civil monetary penalties against Defendants after the criminal case pending against Defendant Christopher W. Bass ("Defendant Bass" or "Bass") before the Court is resolved. See United States v. Christopher Bass, No. 10-CR-166 (N.D.N.Y.) (Kahn, J.).


In its Complaint, Plaintiff alleges that Defendants violated §§ 5(a), 5(c), and 17(a) of the Securities Act, as well as § 10(b) of the Exchange Act and Rule 10b-5 thereunder. Compl. ¶ 6 (citing 15 U.S.C. §§ 77e(a), (c); 77q(a); 78j(b); 17 C.F.R. § 240.10b-5). Plaintiff claims that Defendants operated a Ponzi scheme during the period of January 2007 through June 2009, fraudulently obtaining approximately $5.9 million from over 400 investors. Compl. ¶ 1. Plaintiff further alleges that Defendant Bass was the primary orchestrator of the scheme. Id. Bass is the sole shareholder, president, and CEO of Swiss Capital Harbor-USA, LLC ("SCH"), the New York corporation named as a Defendant in this action. Id. ¶ 13. Bass also formed -- and installed SCH as the general partner of -- each of the Delaware limited partnerships named as Defendants in this action: Swiss Capital Harbor Fund A Partners, L.P. ("LP A"); Swiss Capital Harbor Fund B Partners, L.P. ("LP B"); Swiss Capital Harbor Fund C Partners, L.P. ("LP C"). Id. ¶ 14.

The SEC served each Defendant with a Summons and the Complaint, and filed proof of service with this Court. Affidavit of Service (Dkt. No. 4). Only Defendant Bass appeared in response, submitting a Motion on August 8, 2010 requesting an extension of time to file an answer. Dkt. No. 5. Although the Court granted his request and extended the deadline to September 1, 2010, Defendants failed to file any response. Meanwhile, Defendant Bass pled guilty to parallel criminal charges arising out of these transactions on August 19, 2010. Christopher Bass, No. 10-CR-166, Dkt. No. 15 ("Plea Agreement").

Plaintiff wrote to Defendant Bass on both September 3, 2010 and September 15, 2010, reminding him of the expired answer deadline and requesting that he confer with Plaintiff regarding the required Civil Case Management Plan. See Dkt Nos. 10-7, 10-9. Although Defendant Bass did respond to Plaintiff by mail, he did not file an answer with the Court, and he did not agree to confer on the Civil Case Management Plan. See Bass Letter of September 7, 2010 (Dkt. No. 10-8) ("Sept. 7 Letter"); Bass Letter of September 20, 2010 (Dkt. No. 10-10) ("Sept. 20 Letter"); Bass Letter of September 30, 2010 (Dkt. No. 10-10) ("Sept. 30 Letter"). Despite his guilty plea, Defendant Bass continued to deny wrongdoing in these letters. Id. Plaintiff filed a Request for entry of default on September 23, 2010 (Dkt. No. 6), and the Clerk of the Court granted such entry as to each Defendant on October 6, 2010. Entry of default (Dkt. No. 9). Plaintiff then filed a Motion for default judgment as to each of the Defendants on December 6, 2010, and properly served each Defendant with notice of the Motion. See Motion; Certificate of service (Dkt. No. 11). To date, none of the Defendants have responded to either the Complaint or the Motion, and it has been over a year since any Defendant has appeared in this action.


A. Standard of Review

After the Clerk has filed an entry of default against a party that has failed to plead or otherwise defend, Federal Rule of Civil Procedure 55(b) allows a court to enter default judgment upon application of the opposing party. FED. R. CIV. P. 55(b). Default judgment is an extreme sanction, and decisions on the merits are favored. Meehan v. Snow, 652 F.2d 274, 277 (2d Cir.1981). However, default judgment is ordinarily justified when a civil party fails to respond after having received proper notice. See Bermudez v. Reid, 733 F.2d 18, 21 (2d. Cir. 1984).

After an entry of default has been entered, all of the well-pleaded allegations in plaintiff's complaint pertaining to liability are deemed true. See Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 108 (2d Cir. 1997) (recognizing that the factual allegations in the complaint, except those relating to damages, are deemed true after default). As the Defendants failed to answer either Plaintiff's Complaint or Motion, and as an entry of default has been made in this case, the Court deems true the relevant and well-pleaded factual allegations in Plaintiff's Complaint.

B. Defendants' Liability under the Securities and Exchange Acts Plaintiff's pleadings, taken as true, establish each of the alleged violations, and the Court finds that default judgment in favor of Plaintiff is appropriate.

1. Violations of § 5 of the Securities Act

To establish a prima facie case for a violation of § 5 of the Securities Act, the SEC must prove three elements: (1) that no registration statement was in effect as to the securities; (2) that Defendants sold or offered to sell these securities; and (3) that there was a use of interstate transportation, communication, or mail in connection with the sale or offer to sell. See 15 U.S.C. § 77e(a), (c); SEC v. Cavanagh, 1 F. Supp. 2d 337, 361 (S.D.N.Y. 1998). Liability extends to all necessary participants in the sale of securities. Id. at 372.

The Complaint alleges facts sufficient to establish a prima facie case that each Defendant committed § 5 violations. First, Defendants failed to register with the Commission the securities offered and sold as part of their Ponzi scheme. Compl. ¶¶ 4, 33. Second, Defendants sold and/or offered to sell these securities to the public. Id. ¶¶ 15-17, 23, 25, 27-31. Third, Defendants used the telephone, mail, wires, and other means of interstate commerce to offer and sell these securities to the public. Id. ¶ 11. Defendants are deemed to have admitted Plaintiff's claim that these securities did not ...

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