Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_14-cv-00347/USCOURTS-casd-3_14-cv-00347-3/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 28:1332sa Diversity: Securities &amp; Exchange Commiss

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

SECURITIES AND EXCHANGE

COMMISSION,

Plaintiff,

CASE NO. 14cv347-LAB (BGS)

ORDER ADOPTING REPORT

AND RECOMMENDATION

vs.

JAMES Y. LEE, et al.

Defendants.

On August 5, 2016, Plaintiff Securities and Exchange Commission (SEC, or the

government) filed a motion for terminating sanctions against Relief Defendants Larissa

Ettore, Clayton Lee, and Lolita Gatchalian (collectively, the “Relief Defendants”). Because 1

the motion concerned the Relief Defendants’ behavior in matters committed to both the

District Judge and Magistrate Judge, the motion was referred to Magistrate Judge Bernard

Skomal for a report and recommendation. 

Judge Skomal received briefing and on December 6, 2016 issued his report and

recommendation (the “R&R”), which made factual findings and recommended that the

motion be granted. (Docket no. 99.) Objections to the R&R were due December 20 and

replies were due January 3, but no party has filed any.

The SEC also sought relief against four corporate relief Defendants, but they are the 1

subject of a separate motion. For purposes of this order, Relief Defendants means the three

individuals.

- 1 - 14cv1737

Case 3:14-cv-00347-LAB-BGS Document 101 Filed 01/12/17 PageID.<pageID> Page 1 of 4
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

A district court has jurisdiction to review a Magistrate Judge's report and

recommendation on dispositive matters. Fed R. Civ. P. 72(b). “The district judge must

determine de novo any part of the magistrate judge's disposition that has been properly

objected to.” Fed. R. Civ. P. 72(b)(3). “A judge of the court may accept, reject, or modify,

in whole or in part, the findings or recommendation made by the magistrate judge.” 28

U.S.C. § 636(b)(1). This section does not require some lesser review by the district court

when no objections are filed. Thomas v. Arn, 474 U.S. 140, 149-50 (1985). The ‘statute

makes it clear that the district judge must review the magistrate judge's findings and

recommendations de novo if objection is made, but not otherwise.‘ United States v.

Reyna-Tapia, 328 F.3d 1114, 1121 (9th Cir. 2003) (en banc). 

Even though the Relief Defendants’ failure to object to the R&R would justify its

adoption without further review, the Court is aware that it can review and modify or reject the

R&R. See Orand v. United States, 602 F.2d 207, 208 (9th Cir.1979) (“If neither party

contests the magistrate's proposed findings of fact, the court may assume their correctness

and decide the motion on the applicable law.”). 

Background

The R&R’s factual findings, including its findings concerning the case’s procedural

history and the parties’ behavior, appear to be correct, and the Court ADOPTS them. See

Turner v. Duncan, 158 F.3d 449, 455 (9th Cir. 1998) (failure to object to factual

determinations waives those issues). In addition, the Court makes the following additional

factual determinations.

This case concerns a fraudulent investment scheme by James Y. Lee, who has

already pled guilty to obstructing justice and securities fraud, and now incarcerated. It is one

of three related cases. In case 14cv1737, SEC v. Lee, as well as in this case, judgment has

been entered against Lee. He is facing default judgment in another related case, 14cv542,

Ayers v. Lee. Relief Defendants have or have had close and ongoing associations with Lee. 

According to the complaint, Lee diverted significant assets to them; this action seeks

disgorgement of those assets. 

- 2 - 14cv1737

Case 3:14-cv-00347-LAB-BGS Document 101 Filed 01/12/17 PageID.<pageID> Page 2 of 4
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

After the Relief Defendants failed to answer, a default was entered against them, and

the SEC moved for default judgment. The Relief Defendants then began to defend. On

April 13, 2015, they requested more time to obtain information to file an opposition, which

the Court granted. On May 4, 2015, they filed a lengthy opposition to the motion for default

judgment. They did not dispute that some disgorgement was required, but argued that the

amount the SEC was asking for was excessive. Each of the Relief Defendants asked the

Court to reduce their disgorgement obligation. The Court denied the motion for default

judgment, noting that the Relief Defendants had appeared and were actively trying to

defend. The parties agreed to reopen discovery, and their request for limited discovery was

granted. But instead of cooperating, the Relief Defendants began engaging in tactics that

can only be called obstructionist. These are outlined in detail in the R&R. They include,

among other things, Relief Defendants’ refusal to comply with discovery requests, their

disobedience to the Court’s orders, and their refusal to attend either their own depositions

or the mandatory settlement conference. The SEC then moved for terminating sanctions

against them.

Legal Standards

The R&R correctly sets forth the legal standards for Rule 37(b)(2)(A) sanctions, which

the Court incorporates here by reference. Before imposing such sanctions, the Court must

first make a determination regarding willfulness, bad faith, or fault. The R&R recommends

a finding that the Relief Defendants’ conduct was willful; the Court agrees, and ADOPTS this

recommendation. Their sanctionable conduct was their own fault; it was willful, and

demonstrated bad faith. 

The Court considers the factors set forth case law cited in the R&R, and agrees with

the R&R’s reasoning and conclusions. The Court recognizes that the standard is high and

terminating sanctions will only rarely be appropriate. But these are unusual circumstances,

and the high standard is met here. It also bears mention that the Relief Defendants’ conduct

has left the Court with no fair and reasonable option other than to sanction them as the SEC

requests. As noted, in the past they suggested to the Court that they were prepared to

- 3 - 14cv1737

Case 3:14-cv-00347-LAB-BGS Document 101 Filed 01/12/17 PageID.<pageID> Page 3 of 4
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

defend this case vigorously. Either they did not mean it, or they changed their mind without

saying so, which misled both the Court and the SEC. Their bad faith and willful misbehavior

have successfully delayed the SEC’s recovery, and imposed costs on the SEC. Denying

relief or giving them another chance would simply reward their miscondut. The interests of

justice forbid granting them any more opportunities to engage in any more of the same

misbehavior.

Conclusion and Order

Having reviewed and considered the R&R in its entirety, including its factual findings,

legal analysis, and all the relevant factors, the Court agrees with the R&R. The R&R is

MODIFIED to include the additional discussion regarding the Relief Defendants’ willfulness

and bad faith, and the appropriateness of terminating sanctions. So modified, the R&R is

ADOPTED. The government’s motion for terminating sanctions against the three individual

Relief Defendants is GRANTED. The government is directed to electronically lodge an order

in editable electronic format granting the motion and awarding relief.

The deadline has passed for the remaining Defendants to oppose the government’s

ex parte motion for reconsideration (Docket no. 100), and the Court expects to be able to

rule on that motion shortly. Pending that decision, the government’s counsel is directed to

begin drafting a proposed order of judgment. 

IT IS SO ORDERED.

DATED: January 12, 2017

HONORABLE LARRY ALAN BURNS

United States District Judge

- 4 - 14cv1737

Case 3:14-cv-00347-LAB-BGS Document 101 Filed 01/12/17 PageID.<pageID> Page 4 of 4