Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_14-cv-00347/USCOURTS-casd-3_14-cv-00347-4/pdf.json

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

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

SECURITIES AND EXCHANGE

COMMISSION,

Plaintiff,

CASE NO. 14cv347-LAB (BGS)

ORDER GRANTING MOTION FOR

RECONSIDERATION; AND

ORDER GRANTING MOTION FOR

DEFAULT JUDGMENT AGAINST

DEFENDANTS ELX

INTERNATIONAL, INC.;

ADVANCED CENTURY CORP.;

ULTRA INTERNATIONAL, INC.;

AND SOT GROUP, INC.

vs.

JAMES Y. LEE, et al.

Defendants.

The Court has separately granted judgments against Defendants James Y. Lee,

Larissa O. Ettore, Clayton K. Lee, and Lolita Gatchalian. The remaining four Defendants are

ELX International, Inc.; Advanced Century Corp.; Ultra International, Inc.; and SOT Group,

Inc. (collectively, the “Corporate Relief Defendants”). On March 7, 2016, the Court denied

the SEC’s motion for default judgment against, inter alia, ELX and SOT Group. But after

counsel for those two Defendants was granted leave to withdraw and they had effectively

consented to submit to a default judgment, the Court permitted the SEC to seek

reconsideration of that denial. (Docket no. 98.)

The SEC has now filed its motion for reconsideration, but has also requested default

judgment against Advanced Century and Ultra. The record shows that Gatchalian was an

officer or director of Ultra, and Clayton Lee was an officer or director of Advanced Century. 

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(See Complaint, ¶ 20 (identifying Clayton Lee as the sole officer and director of Advanced

Century) and ¶ 22 (identifying Gatchalian as the sole officer and director of Ultra); Docket

no. 8 (waiver of service on behalf of Advanced Century signed by Clayton Lee); Docket no.

11 (waiver of service on behalf of Ultra signed by Gatchalian).) Both are alleged to have

been shell entities that Defendant James Lee and his associates used to divert funds. 

(Compl., ¶ 72.) Both were subjects of the same motion for default judgment and neither filed

an opposition, even though both Clayton Lee and Gatchalian had been given notice of both

the motion and the order requiring a response. Other than waiving service, neither Ultra nor

Advanced Century ever made an appearance.

Although the Court did not formally give the SEC leave to seek reconsideration

against Ultra and Advanced Century, the rationale for reconsideration applies equally to

them, and the Court accepts the motion as filed.1

Legal Standards

The decision to grant default judgment is within the Court’s discretion. See Eitel v. McCool,

782 F.2d 1470, 1471 (9th Cir. 1986). “Factors which may be considered by courts in

exercising discretion as to the entry of a default judgment include: (1) the possibility of

prejudice to the plaintiff, (2) the merits of plaintiff's substantive claim, (3) the sufficiency of

the complaint, (4) the sum of money at stake in the action; (5) the possibility of a dispute

concerning material facts; (6) whether the default was due to excusable neglect, and (7) the

strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the

merits.” Id. at 1471–72.

Discussion

The Corporate Relief Defendants are alleged to be closely-held corporations that

served essentially as tools of James Lee and the other Defendants, which they used to divert

Even if the Court were not treating Ultra and Advanced Century as within the scope 1

of the motion for reconsideration, it could and would reconsider the motion sua sponte. See

City of Los Angeles, Harbor Div. v. Santa Monica Baykeeper, 254 F.3d 882, 885 (9 Cir. th

2001) (holding that district court had discretion to reconsider its own order sua sponte, and

noting that all trial court rulings “are subject to revision at any time before the entry of

judgment”).

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or hide funds. In other words, the interests of these corporations are essentially the same

as the interests of the other Defendants, and no third parties are ever identified as owning

any interest in them. Although all four have appeared, none of them are represented by

counsel, and none are either offering any defense or prepared to offer one.

Developments since the Court’s original denial of default judgment have completely

altered the case’s posture. At the time of the initial denial, the individual Defendants were

offering a defense; now, they have all either submitted to judgment or have had judgment

granted against them. The remaining claims against the Corporate Relief Defendants seem

almost an afterthought; the SEC is pressing them simply to make sure it can recover all the

money the other Defendants unlawfully obtained.

Eitel Factors 1 and 7

At this point, the only avenue for recovery against the Corporate Relief Defendants

is default judgment. None of them are represented by counsel, and they may not proceed

pro se, so they cannot defend against summary judgment nor could they appear at trial. In

other words, no decision on the merits is possible. Denying default judgment would

prejudice the SEC by effectively denying it any recovery against the Corporate Relief

Defendants. The first factor weighs strongly in favor of default judgment. And because no

judgment on the merits is possible, the policy favoring decisions on the merits has no

application here.

Eitel Factors 2, 3, and 5

The principal Defendant, James Y. Lee, has pled guilty to obstructing justice and

securities fraud, and now incarcerated. This is one of three related civil cases. In case

14cv1737, SEC v. Lee, as well as in this case, judgment has been entered against him. He

is facing default judgment in another related case, 14cv542, Ayers v. Lee. The other

individual Defendants were alleged to have helped him in his scheme and in some cases to

have helped him divert and hide his ill-gotten gains. By a separate order, judgment is being

entered against them in this case. Because Lee and his associates are being held liable,

there is no real doubt that the four corporations they controlled should be held liable as well. 

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At the time the Court initially denied default judgment, there were factual disputes regarding

scienter, the traceability of funds, the degree to which the Relief Defendants might have

given value for the funds they received, and other issues. Entry of judgment against the

individual Defendants has eliminated those issues. 

The SEC has also provided good reasons why its claims against the Corporate Relief

Defendants are meritorious. These three factors weigh in favor of default judgment.

Eitel Factor 4

The SEC seeks $1,024,491.55 from ELX; $943,045.16 from SOT; $756,526.41 from

Advanced Century; and $148,758.62 from Ultra, plus prejudgment interest. These are

substantial sums. The fact that a large sum of money is at stake tends to weigh against

default judgment. Eitel, 782 F.2d at 1472.

In opposition to the earlier motion for default judgment, the individual Relief

Defendants conceded they owed something, but argued that the amounts were inflated.

Here, though, no material facts are in dispute. Because the Corporate Relief Defendants

are all corporations, liability will not flow to third parties. And because are owned and

controlled by other Defendants, there is no real danger that third parties will suffer in some

other way. In other words, the only people who will suffer from the entry of this judgment are

Defendants against who are already being held liable.

Furthermore, accepting the Complaint’s allegations as true, the Corporate Relief

Defendants were essentially conduits for the other Defendants, and had no other business

or income. In other words, any assets they have appear to be the proceeds of fraud.

Although the amount sought is substantial, there is no reason to believe it is inflated. See,

e.g., Sipe v. Country Wide Bank, 2012 WL 4026127 at *9 (E.D. Cal., Sept. 12, 2012) (citing

authority for the principle that a request for a large sum does not weigh against default

judgment, if the amount is not excessive). This factor weighs against default judgment,

although not strongly.

/ / /

/ / /

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Eitel Factor 6

The Corporate Relief Defendants’ default was clearly not the product of excusable

neglect. ELX and SOT knowingly submitted to a default judgment. And the other two,

through their principals, have known about this action and about the motion for default

judgment. The principals, in their individual capacities, actively defended, while failing to

offer an defense on behalf of the corporations. Furthermore, all four failed to oppose the

motion for reconsideration. The Corporate Relief Defendants’ default bears all the earmarks

of a deliberate decision.

Conclusion and Order

Having considered all the Eitel factors, the new developments in this case, and the

SEC’s arguments, the Court concludes that default judgment is proper. The Court

RECONSIDERS its order denying default judgment, and now GRANTS that motion. 

By a separate order, the Court granted the SEC’s motion for terminating sanctions

against the three individual Relief Defendants. The SEC is now ORDERED to submit a

proposed order in editable electronic format, granting judgment against all Relief

Defendants, individual and corporate, and awarding relief. The proposed order should be

submitted by email no later than January 27, 2017. The subject line of the email should

include the case name and number, and all counsel shall be copied on the email.

With the issuance of the order of judgment against all Relief Defendants, the Court

believes all issues in this case will have been adjudicated. If other issues remain, any party

may file a notice by January 27, 2017 explaining what those issues are. Otherwise, the

judgment against the Relief Defendants will also be the final judgment in this case.

IT IS SO ORDERED.

DATED: January 12, 2017

HONORABLE LARRY ALAN BURNS

United States District Judge

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