Commodity Futures Trading Comm'n v. Venture Capital Invs. Ltd.

COMMODITY FUTURES TRADING COMMISSION, Plaintiff, v. VENTURE CAPITAL INVESTMENTS LTD, and BREONNA S. CLARK, Defendant.

Civil Action No. 1:20-cv-00382-DDD-MEH

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

November 2, 2020

Judge Daniel D. Domenico

ORDER GRANTING MOTION FOR DEFAULT JUDGMENT

Before the court is Plaintiff Commodity Futures Trading Commission's motion for default judgment against Defendants Venture Capital Investments, Ltd., and Breonna S. Clark. For the following reasons, the court GRANTS the motion.

BACKGROUND

Because this case is before the court on the Commission's motion for entry of default judgment and Defendants have failed to answer or otherwise respond to the complaint, the court deems as true the material well-pleaded allegations in the complaint. Pers. Indus. Loan Corp. v. Forgay, 240 F.2d 18, 20 (10th Cir. 1956) ("By failing to appear and permitting a default judgment to be entered, [the defendant] admitted only facts well pleaded."). "In addition, the court accepts the undisputed facts set forth in any affidavits and exhibits." Purzel Video GmbH v. Biby, 13 F. Supp. 3d 1127, 1135 (D. Colo. 2014).

This case arises from Defendants' fraudulent solicitations of seventy-two participants to trade foreign and electronic currencies (also known as "forex"), including Bitcoin and Altcoin in a commodity pool operated by Defendants. Compl., Doc. 1 at ¶ 24. A "commodity pool" sounds like what it is: an entity formed to trade commodity interests, see 7 U.S.C. § 1a(10). Defendants found pool participants through social media, email, webinars, and face-to-face meetings. Id. A commodity pool isn't necessarily illegal, but this one was. Defendants ultimately solicited $535,829 from the pool participants, misappropriating $450,302 of that sum for personal use and, in a small-time imitation of a Bernie-Madoff-Ponzi scheme, for making payments to pool members so it appeared as though the pool was profitable. Id.

In the course of operating their fraudulent commodity pool, Defendants made numerous false statements of their experience and expertise in foreign and virtual currencies like Bitcoin. In October 2018, Defendants told a prospective pool participant that Defendants employed a "master team of traders [who could] execute the Foreign Exchange markets with precision and accuracy." Id. at ¶ 25. Earlier that year, Defendants posted on Facebook that in "investing in Venture you could yield [a] 12-16% [return] per month." Id. Other times they promised an "18% weekly" return on "crypto investments" and as much as a "21%" return on investment from Venture Capital. Id. In reality, Clark had little to no trading experience, Venture Capital had no team of highly experienced traders, and the pool money actually traded by Venture Capital and Ms. Clark was lost. Id. at ¶¶ 27-30.

Defendants misrepresented the risk of investing in cryptocurrency to pool participants. In April 2018, Defendants told prospective pool members that, if they joined the pool, they would receive a "capital lock," which would ensure the capital they invested would be protected fromloss. Id. at ¶ 32. Defendants reiterated this misrepresentation to potential pool participants in October 2018. Id.

Defendants' misrepresentations were successful—a total of seventy-two pool participants sent $534,829 to Defendants' bank accounts. Id. at ¶ 35. Of this, Defendants invested $121,165 in cryptocurrency trades that lost approximately $84,000. Id. at ¶ 36. With the remaining $450,302, Ms. Clark purchased a car, jewelry, and other personal items, and made payments to pool members so it appeared as though the commodity pool was profitable. Id. at ¶ 37. Defendants' concealed their scheme by sending out falsified account statements that showed trading gains. Id. at ¶ 38. One of these account statements reported a 67-percent return over a fourteen-week period. Id. Another account statement showed a 26-percent return over the last month. Id. When several pool participants requested to withdraw their funds, Ms. Clark falsely told them that an ongoing "CFTC audit" prevented her from permitting withdrawal. Id. at ¶ 41.

After investigation, the Commission filed this suit against Venture Capital and Ms. Clark on February 14, 2020, asserting four claims under the Commodity Exchange Act:

(1) fraud by a community pool operator or community trade advisor in violation of 7 U.S.C. § 6o(1);

(2) fraud by deceptive device in violation of 7 U.S.C. § 9(1);

(3) failure to register as a community pool operator in violation of 7 U.S.C. § 6(m)(1) and provisions implementing regulation, 17 C.F.R. § 5.3 (a)(2)(i); and(4) failure to register as a community trade advisor in violation of 7 U.S.C. § 6m(1) and that provision's implementing regulation, 17 C.F.R. § 5.3(a)(3)(i).

Doc. 1. On February 18, 2020, Venture Capital and Ms. Clark were served with the summons and the complaint. Docs. 6, 8, 10. Venture Capital's service agent was served on February 28, 2020. Doc. 7. Despite being served, Venture Capital and Ms. Clark did not answer or otherwise respond to the complaint, so the Commission moved the clerk of court for an entry of default against the Defendants. Doc. 12. The clerk entered default against Ms. Clark on March 17, 2020, and against Venture Capital on March 23, 2020. Docs. 13, 21. The Commission then moved for the now-pending motion for entry of default judgment. Doc. 29.

ANALYSIS

Under Rule 55(b), after the clerk enters default, a court must enter a default judgment against a party that has failed to plead or otherwise defend an action brought against it. Default judgment may be entered by the clerk if the claim is for a "sum certain," Fed. R. Civ. P. 55(b)(1), but in all other cases, "the party must apply to the court for a default judgment." Fed. R. Civ. P. 55(b)(2). The purpose of a default judgment is to protect a diligent party against an unresponsive adversary. In re Rains, 946 F.2d 731, 732-33 (10th Cir. 1991).

I. Jurisdiction

Before a court can enter default judgment it must ensure it has jurisdiction over the matter. Dennis Garberg & Assocs., Inc. v. Pack-Tech Int'l Corp., 115 F.3d 767, 771 (10th Cir. 1997). The Court has subject matter jurisdiction under 28 U.S.C. § 1331, which grants jurisdiction tofederal courts over questions "arising under" federal law, and 28 U.S.C. § 1345, which grants federal district courts jurisdiction over civil suits "commenced by the United States." All of the Commission's claims are asserted under federal statutes or regulations, and this is a civil suit filed by the United States.

The Court also has personal jurisdiction over Defendants. The moving party bears the burden of proof to show that the Court has jurisdiction over Defendants under Colorado's long-arm statute and that they have minimum contacts with the state. Dennis, 115 F.3d at 771. But in the context of a motion for default judgment, the petitioner's burden is a minimal one: the petitioner "need only make a prima facie showing on these two questions if the motion is decided only on the basis the parties' affidavits and other written materials," as it is here. Id.; see also Fed. Deposit Ins. Corp. v. Oaklawn Apartments, 959 F.2d 170, 174 (10th Cir. 1992) (explaining that well-pleaded allegations in complaint are accepted as true for purposes of determining personal jurisdiction at pleading stage).

The complaint satisfies this standard. It alleges that Ms. Clark is a resident of Colorado and that she is the control-person of Venture Capital which is also located and incorporated in Colorado. Doc. 1 at ¶¶ 1112. This is sufficient for the Court to exercise general personal jurisdiction over a defendant. Daimler AG v. Bauman, 571 U.S. 117, 137 (2014) ("With respect to a corporation, the place of incorporation and principal place of business are paradigm bases for general jurisdiction." (alterations adopted; citations omitted)); Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915, 924 (2011) ("For an individual, the paradigm forum for the exercise of general jurisdiction is the individual's domicile.").

II. Entry of Default Judgment

Having assured it has jurisdiction over this matter, the court must decide "whether the unchallenged facts constitute a legitimate cause of action" such that a judgment should be entered. Bixler v. Foster, 596 F.3d 751, 762 (10th Cir. 2010) (quoting 10A Charles A. Wright, Arthur R. Miller & Mary K. Kane, Fed. Prac. & Proc. § 2688, at 63 (3d ed. 1998)). "There must be a sufficient basis in the pleadings for the judgment entered." Id. (quoting Nishimatsu Constr. Co. v. Houston Nat'l Bank, 515 F.2d 1200, 1206 (5th Cir. 1975)). "A party is not entitled to a default judgment as of right; rather the entry of a default judgment is entrusted to the 'sound judicial discretion' of the court." Greenwich Ins. Co. v. Daniel Law Firm, No. 07-cv-2445- LTB-MJW, 2008 WL 793606, at *2 (D. Colo. Mar. 22, 2008) (quoting Cablevision of S. Conn., Ltd. P'ship v. Smith, 141 F. Supp. 2d 277, 281 (D. Conn. 2001)).

On review of a motion for default judgment, if default was properly entered, the moving party enjoys the benefit of deferential pleading interpretation. See Olcott v. Del. Flood Co., 327 F.3d 1115, 1125 (10th Cir. 2003). The court deems the well-pleaded facts of the complaint to be true. Vibe Tech., LLC v. Suddath, No. 06-cv-00812, 2009 WL 2055186, at *1 (D. Colo. 2009) (citing Dundee Cement Co. v. Howard Pipe & Concrete Prods., Inc., 722 F.2d 1319, 1323 (7th Cir. 1983)). Undisputed facts set forth by the moving party in affidavits and exhibits are also accepted as true. Id.

A. Count I: Fraud by a community pool operator or community trade advisor in violation of 7 U.S.C. § 6o(1)

7 U.S.C. § 6o(1), makes it

unlawful for a commodity trading advisor, associated person of a commodity trading advisor, commodity pooloperator, or associated person of a commodity pool operator, by use of the mails or any means or instrumentality of interstate commerce,

...