Sec. & Exch. Comm'n v. Causwave, Inc.

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CAUSWAVE, INC., JEFFREY L. RIGGS, and DIANE R. BALDWIN, Defendants.

1:15CV1068

UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF NORTH CAROLINA

September 26, 2018

MEMORANDUM OPINION AND ORDER

This matter is before the Court on Defendant Jeffrey L. Riggs's "Notice of Motion to Vacate Order for Default Entered Against Him" [Doc. # 65], Plaintiff Securities and Exchange Commission's Motion for Default Judgment as to Defendant's CAUSwave, Inc. and Jeffrey L. Riggs [Doc. #67], and the Securities and Exchange Commission's Motion to Dismiss with Prejudice All Claims Against Defendant Diane R. Baldwin [Doc. #74]. As explained more fully below, Riggs's Motion is denied, the Securities and Exchange Commission's Motion for Default Judgment is granted, and the Securities and Exchange Commission's Motion to Dismiss its claims against Baldwin is granted.

On December 16, 2015, the Securities and Exchange Commission ("SEC") instituted this action against CAUSwave, Inc. ("CAUSwave"), Riggs, and Baldwin, alleging that they variously committed fraud in violation of § 10(b) of the Exchange Act (15 U.S.C. § 78j(b)), Rule 10b-5 thereunder (17 C.F.R. § 240.10b-5), and § 17(a) of the Securities Act (15 U.S.C. § 77q(a)), registration violations prohibited by §§ 5(a) and 5(c) of the Securities Act (15 U.S.C. §§ 77e(a), 77e(c)), and aided and abetted such violations. Over the course of the litigation, default was entered against CAUSwave, (see Order [Doc. #52] & Entry of Default [Doc. #53]), and Riggs, (see Order [Doc. #62] & Entry of Default [Doc. #63]).

I.

Riggs filed a "Notice of Motion to Vacate Order for Default Entered Against Him as Ultra Vires, Done in Violation of Settled Principles of Law, Public Policy, Aldrich v. Bowen, 130 F.3d 1364, 1365 (9th Cir. 1997), etc., and Other Settled Law Cited Herein See: 28 U.S. Code § 636(C)(1)". In this Notice, Riggs makes the same arguments he has made in prior filings challenging the Magistrate Judge's authority, (compare Notice at 3-6 [Doc. #65] with Def. Jeffrey L. Riggs's Aff. in Opp'n ¶¶ 1-15 [Doc. #60] & Def. Jeffrey Riggs's Aff. in Resp. ¶¶ 1-14 [Doc. #50]), which the Court has previously settled, (see Order [Doc. #62] & Order [Doc. #52]). He further argues that the Court "relied on an unlawful" finding of the Magistrate Judge when it adopted the November 13, 2017 Recommendation with modification and ordered the Clerk to enter default against Riggs. However, Riggs made the same arguments challenging the authority of the Magistrate Judge when he objected to the Recommendation, which the Court reviewed before adopting the Recommendation with modification and ordering entry of default. Therefore, for the reasons previously stated, (see Order [Doc. #62] & Order [Doc. #52]), Riggs's motion is denied.

II.

Before addressing the SEC's motion for default judgment, its motion to dismiss claims against Baldwin is addressed because it disposes of the only party to this action other than CAUSwave and Riggs. Cf. Fed. R. Civ. P. 54(b) (providing "when multiple parties are involved, the court may direct entry of a final judgment as to one or more, but fewer than all, . . . parties only if the court expressly determines that there is no just reason for delay"). On March 21, 2018, counsel for Baldwin notified the Court of her death. (See [Doc. #64].) The SEC "consider[ed] what steps, if any, may be continued with respect to Ms. Baldwin", (SEC's Br. in Supp. at 3 n.2 [Doc. #68]), and "has determined it is appropriate to dismiss all claims against" her with prejudice, (SEC's Mot. to Dismiss at 1-2). Her former counsel and her son consent to the motion, while neither CAUSwave nor Riggs have responded to the SEC's request for consent. Based on the foregoing, the SEC's motion is granted.

III.

A.

The SEC also moves for default judgment against CAUSwave and Riggs pursuant to Rule 55(b)(2) of the Federal Rules of Civil Procedure. Because default has been entered against CAUSwave and Riggs, "the factual allegations of the complaint, except those relating to the amount of damages¹, will be taken as true."SEC v. Marker, 427 F. Supp. 2d 583, 586 (M.D.N.C. 2006). In April 2008, Riggs and Baldwin formed UTISA, Inc., which became CAUSwave later that year. (Compl. ¶ 16 [Doc. #1].) The company's ostensible purpose was to raise money to fund research and development of products using a self-described scientific process involving alternative energy conversion. (Id.) CAUSwave's website was publicly available and touted the company's technologies and had links for the public to contact the company. (Id. ¶ 17.) Riggs exercised control of CAUSwave by signing contracts on its behalf, directing payments from the corporate bank accounts, and drafting and issuing statements on its behalf. (Id. ¶ 18.)

Beginning in February 2009, Riggs and CAUSwave began raising money through the sale of shares of the company by word of mouth, phone calls, shareholder meetings, and regular, written updates typically sent via email ("Investor Updates"). (Id. ¶ 19.) The individual shareholders who purchased shares of CAUSwave received Class B, non-voting shares of CAUSwave for $600 per share. (Id. ¶ 20; see also Decl. of Elizabeth P. Skola ¶ 9 (noting that between February 2009 and approximately March 2015, CAUSwave issued approximately 14,972 shares of Class B non-voting stock to investors for $600 per share) (Apr. 10, 2018) [Doc. #68-2].) Between approximately February 2009 and approximately March 2015, CAUSwave raised approximately $8,983,200 in investor funds through the sale of these Class B shares. (Decl. of Skola ¶ 10.)

In approximately August 2009, Riggs began communicating with a possible institutional investor regarding a potential investment in CAUSwave. (Compl. ¶ 22.) This institutional investor represented that he could and would make a very large investment into CAUSwave once he secured funds from internationally-based third-parties who had access to large gold reserves, but he needed cash from CAUSwave in order to secure those funds. (Id.) In response, between September 2009 and March 2015, Riggs sent approximately $500,000 of CAUSwave's investor money to this purported institutional investor, but never received any money from that investor or any other institutional investor. (Id. ¶ 23.)

Meanwhile, from March 2009 through at least April 2015, CAUSwave sent regular Investor Updates - drafted, finalized, and signed by Riggs - to its individual friends and colleague investors and prospective investors with information regarding, among other things, the company's fundraising efforts. (Id. ¶¶ 24, 25.) The Investor Updates included CAUSwave's November 23, 2011 statement that "today we received long awaited funds from our institutional investors" when, in fact, the company's bank accounts had combined balances of less than $100 on that date. (Id. ¶ 27.) On March 19, 2014, Riggs advised investors that an institutional investor "has provided CAUSwave a second tranche of bridge funding/operating capital" when, in fact, as of March 2014 and all material times thereafter, CAUSwave had not received and did not receive money from any source other than the general individual investors. (Id. ¶ 28.) Riggs repeatedly promised investors that, once the institutional investor funding was received,investors would have the opportunity to sell their Class B shares back to CAUSwave for a price significantly higher than their original purchase price of $600. (Id. ¶ 29.) In the September 16, 2014 Investor Update, Riggs stated that "the investor's commitment to $70,000 per share at the time of buy-back remains firm" when he knew that CAUSwave had not received any funds from any institutional investor, nor any firm commitment to buy back the shares of the investors. (Id. ¶¶ 29, 30.) In addition, in the Investor Updates, CAUSwave and Riggs claimed that CAUSwave would be the recipient of grant funds and that the company would be involved in a $20 billion merger. (Id. ¶ 33.)

CAUSwave and Riggs failed to disclose to investors that CAUSwave had paid hundreds of thousands of dollars to institutional investors from whom it was seeking investment money and no institutional investor ever provided any investment funding. (Id. ¶ 31.) They failed to update or correct their prior statements to investors regarding the funding from institutional investors and continued to tell investors that the funds were imminent. (Id. ¶ 32.)

Throughout this time, CAUSwave's only source of money was from the sale of stock to individual investors; it had no revenue or income from operations at any time. (Id. ¶ 37; see also Decl. of Skola ¶ 11 (noting the only source of income was from the sale of stock to investors).) CAUSwave and Riggs continually represented to investors that the company intended to develop various technologies when, in fact, substantial investor funds were diverted to Riggs. (Compl. ¶ 38.) Between approximately August 2009 and approximately April2015, CAUSwave paid at least $1,206,000 in consulting fees, loans, and unexplained payments to Riggs. (Decl. of Skola ¶ 12.) CAUSwave and Riggs failed to disclose to investors that substantial percentages of their investments were being diverted to Riggs. (Compl. ¶ 39.)

In addition, from 2009 until March 2015, Riggs and CAUSwave continuously offered and sold shares of stock in CAUSwave, including offers of shares via the Investor Updates, but made no attempt to restrict the sales of shares to investors from a single state or to ascertain whether potential purchasers were accredited investors. (Id. ¶ 34.) On or about June 2, 2014, CAUSwave filed a Form D with the SEC, claiming an exemption from registration and disclosing that, as of that date, the company had sold $4,427,575 of its securities to 298 non-accredited investors. (Id. ¶ 35.) Riggs signed the Form D in his capacity as President and Chief Executive Officer of CAUSwave. (Id.) The company has not registered any...