Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_09-cv-01840/USCOURTS-cand-4_09-cv-01840-9/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Insurance Contract

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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

EXECUTIVE RISK SPECIALITY

INSURANCE COMPANY,

Plaintiff(s),

v.

CROCKER SECURITIES LLC, et

al.,

Defendant(s).

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No. C09-1840 PJH (BZ)

AMENDED REPORT 

AND RECOMMENDATION 

Plaintiff Executive Risk Specialty Insurance Company

(“plaintiff”) has applied for entry of default judgment

against defendant Douglas Green (“defendant”). Defendant has

not appeared in this action and did not respond to plaintiff’s

application. By Order dated October 30, 2009, the Honorable

Phyllis J. Hamilton referred to me plaintiff’s motion for

entry of default judgment. By Order dated December 17, 2009,

I required further briefing. The following is my report and

recommendation for the entry of default judgment against

defendant.

On April 28, 2009 plaintiff filed a complaint against

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1 A court may not enter a default judgment against an

unrepresented minor, an incompetent person, or a person in

military service. Fed. R. Civ. P. 55(b)(2); 50 App. U.S.C. 

521. Plaintiff has obtained a certificate from the Department

of Defense Manpower Data Center which confirms that defendant

is not an active member of the military. Further, the process

server that served defendant’s wife with notice of this motion

stated that defendant’s wife confirmed that defendant was not

in the military. Marshall Decl. ¶ 3. 

2

Crocker Securities LLC, Kevin Martin, Lisa Mello, and Douglas

Green seeking a declaration that it is not required to provide

coverage, indemnity, or defense in two separate actions. All

defendants except for Green have entered into a settlement

agreement and were dismissed by Order dated October 16, 2009. 

Plaintiff personally served the defendant on May 22,

2009. Doc. No. 11. Defendant failed to answer the complaint

or otherwise defend the action. On September 10, 2009, upon

plaintiff’s request, the clerk of this court entered

defendant’s default under Rule 55(a). By its default,

defendant is deemed to have admitted the well-pleaded

averments of the complaint. TeleVideo Systems, Inc. v.

Heidenthal, 826 F.2d 915, 917-18 (9th Cir. 1987). Plaintiff

submitted sufficient evidence to prove that defendant is not a

minor, incompetent, or currently serving in the military.1

Pursuant to Rule 55(b)(2), the Court may enter a default

judgment against a party against whom default has been

entered. The decision to grant or deny a default judgment

under Rule 55(b) is within the discretion of the Court. Eitel

v. McCool, 782 F.2d 1470, 1471-72 (9th Cir. 1986). 

According to the allegations of the complaint, plaintiff

entered into a contract to provide executive and professional

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2 The allegations of the complaint restate the

allegations of two other complaints. One is from Pershing, LLC

v. Crocker Securities LLC, Douglas Green, Kevin Martin and Lisa

Mello, FINRA Case No. 08-02336 or the “Arbitration Statement.” 

The other is from Pershing LLC v. Crocker Securities and

Douglas Green, No. CV-08-3141 (WHA) in the United States

District Court for the Northern District of California or the

“Pershing Complaint.” I have compared the complaint in this

case with the Pershing Complaint and the Arbitration Statement

to determine if plaintiff’s references to the other complaints

are accurate. I find that the references are accurate, and

that any allegations in the complaint that restate allegations

from the Arbitration Statement and the Pershing Complaint are

accurate. 

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liability insurance coverage to Crocker Securities LLC

(“Crocker”), a securities brokerage company, and its

employees, including Martin, Mello, and defendant.2 Compl. ¶

14. Plaintiff alleges that defendant engaged in a “series of

fraudulent and fictitious trades . . . for the purpose of

artificially inflating the true market value of the securities

. . . .” Compl. ¶ 17 quoting Pershing Compl. ¶ 7. Further,

“the purported buys and sells involved no change in beneficial

ownership and Defendants controlled both the purchase and sale

price of the security.” Id. The purpose of these allegedly

self-dealing transactions was to induce Pershing, a

clearinghouse, to lend “money in good faith through a margin

account to Crocker Securities . . . based on falsely inflated

prices of the [securities] as reported by Crocker Securities.” 

Compl. ¶ 21 quoting Pershing Compl. ¶ 16. Pershing seeks to

recover “at least $10 million that it lent to Crocker in the

form of margin loans” in both the FINRA and the District Court

proceeding. Compl. ¶ 22. 

Plaintiff now seeks a declaration that it does not have a

duty to defend, indemnify, or provide coverage to defendant

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for claims brought by Pershing in either proceeding. Pershing

is not a party to this action for declaratory relief. 

Plaintiff has advanced several theories in support of its

request for relief, one of which I find persuasive. 

In its fifth claim for relief, plaintiff argues that it

is entitled to its requested declaration because the Policy

excludes coverage for any claim “brought by . . . any entity

through which an Insured has sold an investment or insurance

product . . . .” Compl. ¶ 58 quoting ex. A § III(I). Both

the Pershing Complaint and the Arbitration Statement allege

that Crocker used Pershing’s clearing services and sold

investment products through Pershing. Compl. ¶ 61. 

By Order dated December 17, 2009 I advised plaintiff that

its request for a declaration that it has no duty to indemnify

appeared to be well taken, but that it may still have a duty

to defend. Doc. no. 107. Plaintiff submitted additional

authority and briefing regarding the duty to defend, which I

have considered and find persuasive. Docs. no. 108, 109.

Delgado v. Interinsurance Exchange of the Automobile Club

of So. Calif., states that “the insured need only show that

the underlying claim may fall within policy coverage; the

insurer must prove it cannot.” 47 Cal.4th 302, 308 (2009)

quoting Montrose Chemical Corp. v Superior Court, 6 Cal.4th

287, 300 (1993) (emphasis in original). Further, the duty to

defend exists if the insurer “becomes aware of, or if the

third party lawsuits pleads, facts giving rise to the

potential for coverage under the insuring agreement.” 

Delgado, 47 Cal.4th at 208 quoting Waller v. Truck Ins.

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Exchange, Inc., 11 Cal.4th 1, 19 (1995). 

The admitted well pleaded averments of the complaint

establish that defendant sold securities through Pershing by

using it as a clearinghouse. Both the Arbitration Statement

and the Pershing Complaint state this as well. Plaintiff has

established that the underlying claims cannot fall within the

terms of the underlying policy because the policy language

specifically excludes claims by “any entity through which an

insured has sold any investment . . . .” Liability Coverage

Part of the Policy Section III(I). Because defendant sold

securities through Pershing, there is no potential for

coverage, indemnity, or defense. I therefore RECOMMEND that

the Court GRANT plaintiff’s motion and enter plaintiff’s

proposed order. 

Dated: February 16, 2010 

 Bernard Zimmerman 

 United States Magistrate Judge

G:\BZALL\-REFS\EXECUTIVE RISK V. CROCKER SEC\AMENDED ORDER GRANTING MOTION

FOR DEFAULT JUDGMENT.wpd

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