Wednesday, December 12, 2007
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Ninth Circuit Upholds Default Judgment in Securities Fraud Case
Panel Joins Other Circuits in Placing Burden on Defendant to Prove Lack of Service
By KENNETH OFGANG, Staff Writer
A defendant who claims not to have been personally served with a summons and complaint, but who waits until after a default judgment is entered to raise the issue despite actual knowledge of the proceedings, has the burden of proof, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
Joining several other courts, including the Second and Seventh circuits, that have ruled the same way, a three-judge panel rejected Lawrence Shaw’s attack on a judgment permanently enjoining him from future violations of the Securities and Exchange Act of 1934 and levying a civil penalty of $110,000.
The commission charged that Shaw and his company, Internet Solutions for Business, Inc., had fraudulently promoted the corporation’s stock to the public. The company was a Nevada corporation headquartered in England, and Shaw was its founder, CEO, and largest shareholder.
Shaw was served with an investigative subpoena in the spring of 2000 and testified before the SEC in June of that year.
He was subsequently served with a “Wells notice,” informing him that the SEC staff intended to recommend civil proceedings, and submitted a response. The SEC sued Shaw and his company in 2001 in the U.S. District Court for the District of Nevada.
Served at Headquarters
The commission filed proofs of service showing that the corporation was served through its registered agent in Nevada and that Shaw was personally served by a British process server at the corporation’s headquarters in May 2001.
Neither Shaw nor the corporation answered the complaint, and a default judgment was entered in January 2002.
In August 2005, Shaw moved to set aside the judgment as to him personally. He denied that he had been personally served and set the SEC had fraudulently represented the contrary to the court.
U.S. District Judge Roger L. Hunt ruled that the burden of proof was on Shaw to prove that he was not served, and that he had failed to do so. He also held that Shaw lacked a viable defense and that the commission would be prejudiced if the judgment were set aside, and he denied the motion.
Judge Richard Tallman, writing for the court, explained that because the motion was filed more than a year after judgment was entered, the judgment cannot be set aside on grounds of mistake, excusable neglect, fraud, misrepresentation, and the like, and that the sole ground on which the judgment could be vacated is lack of jurisdiction to enter it.
It was thus error for the district court to consider the issues of whether Shaw had a viable defense and whether the commission would be prejudiced, the appellate jurist explained, but there was no prejudice since Hunt reached the correct result by denying the motion.
‘Principals of Fairness’
While the Ninth Circuit generally holds that the plaintiff has the burden of proving jurisdiction the rule that a defendant must prove lack of personal service for purposes of a motion for relief from default “comports with general principles of fairness,” Tallman reasoned.
He noted that Shaw had actual knowledge of the suit, since he had been in communication with the SEC, and that he could have forced the commission to prove that valid service was made by filing a motion to dismiss under Rule 12 of the Federal Rules of Civil Procedure, rather than waiting more than three years before filing his Rule 60 motion.
“The defendant who chooses not to put the plaintiff to its proof, but instead allows default judgment to be entered and waits, for whatever reason, until a later time to challenge the plaintiff’s action, should have to bear the consequences of such delay,” Tallman wrote.
The judge went on to say that the signed return of service created a presumption that could only be overcome by “strong and convincing evidence,” a standard that Shaw could not meet.
‘Reputable’ Processor
Not only did the process server declare that he served Shaw personally at the corporation’s headquarters, Tallman explained, he filed a supplemental declaration in which he swore that Shaw verified his identity before he was handed the papers. The district judge, Tallman added, found that the process server had “a long and reputable history” and that there was nothing to contradict his sworn testimony.
Shaw gave conflicting explanations as to where he was at the time the process server claimed to have served him, coming up “with new and often contradictory evidence to support his version of the facts,” whenever his story was challenged, supporting the district judge’s conclusion that the process server was more credible, Tallman said.
The judge went on to reject Shaw’s contention that the service was inadequate under English or international law, or under federal rules relating to foreign service. Those arguments were not made in the district court and were therefore waived, Tallman said, in the absence of a showing of exceptional circumstances.
The case is Securities and Exchange Commission v. Shaw, 06-15204.
Copyright 2007, Metropolitan News Company