United States Securities and Exchange Commission v. Valentine

Background

In an administrative proceeding, John Leo Valentine, described as an investment adviser and the founder and former president of Valentine Capital Asset Management, consented to a Securities and Exchange Commission cease-and-desist order dated October 20, 2016. The order imposed a two-year securities-industry bar, a $140,000 civil penalty, and interest. Valentine’s settlement offer stated that he consented without admitting or denying the Commission’s findings.

The Commission’s findings included that Valentine failed to disclose a financial conflict of interest when recommending an investment to clients and misled them about the termination of his firm’s relationship with a prior custodian. Valentine did not seek review of the Commission order, did not make the required payments, and did not challenge the order within the applicable time.

The Commission later filed this lawsuit under provisions of the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 to enforce the Commission order. Valentine waived service, consented to the court’s jurisdiction, and represented himself. He did not answer the complaint or otherwise defend the case. The clerk entered default, and the Commission moved for default judgment. Valentine did not appear at the January 14, 2021 hearing.

Jurisdiction and service

The court determined that it had subject-matter jurisdiction under provisions of the Exchange Act, the Advisers Act, and the Investment Company Act. It also found venue proper, personal jurisdiction over Valentine, and adequate service. The opinion states that Valentine lives in the Northern District of California and waived service.

Default-judgment analysis

Under Federal Rule of Civil Procedure 55(b)(2), a court may enter default judgment when a defendant fails to plead or otherwise defend. The court considered the seven factors commonly used in the Ninth Circuit: potential prejudice to the plaintiff, the merits and sufficiency of the claims, the amount at stake, the possibility of factual disputes, whether the default resulted from excusable neglect, and the policy favoring decisions on the merits.

The court found that the factors favored default judgment. Without judgment, the Commission would have no other recourse to enforce the Commission order. The court also found that the Commission had authority to seek enforcement and that the complaint adequately stated an enforcement claim. Valentine could not use this lawsuit to challenge the validity of the earlier Commission order; according to the court, the underlying issues had already been adjudicated and the remaining task was enforcement.

The court found no indication of a factual dispute or excusable neglect because Valentine had consented to the Commission order, waived service, consented to the court’s jurisdiction, received notice, and had an opportunity to object. Although the Federal Rules generally favor decisions on the merits, the court concluded that Valentine’s failure to participate made such a decision impossible in this case.

Relief

The court granted the Commission’s motion for default judgment and entered judgment against Valentine. The judgment requires him to pay a $140,000 civil monetary penalty, interest under 31 U.S.C. § 3717 through entry of judgment, and post-judgment interest under 28 U.S.C. § 1961.

The judgment also requires Valentine to cease and desist from committing or causing violations, including future violations, of Section 206(2) of the Investment Advisers Act. It bars him from association with specified securities-related entities until he applies for and receives permission to reenter. It separately bars him from participating in penny-stock offerings, in the ways described in the judgment, until he receives the required permission.

The court stated that it could order additional relief needed to enforce the monetary judgment under the Federal Debt Collection Procedures Act and retained jurisdiction to enforce the judgment’s terms.