Securities and Exchange Commission v. Li

Background

The Securities and Exchange Commission (SEC) sued Jerry Li under Sections 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), and 30A of the Securities Exchange Act of 1934, and under Rule 13b2-1. Li was served with the complaint but did not appear or file a response. The clerk certified his default. The SEC then moved for a default judgment and served Li with that motion and its supporting materials.

Liability

A default judgment is a judgment entered against a party who failed to defend. The court still had to determine whether the complaint’s well-pleaded allegations established liability under the law. Because of Li’s default, the court treated those allegations as admitted for purposes of liability.

The court held that the SEC stated a claim under Section 30A, the Foreign Corrupt Practices Act’s anti-bribery provision. The complaint alleged that Li, an officer of an issuer, bribed Chinese government officials to obtain licenses, stop investigations, prevent or reduce fines, and prevent negative media coverage. It also alleged that he used telephone and email communications with people in the United States in connection with entertaining Chinese officials and media representatives.

The court also held that the SEC adequately alleged that Li aided and abetted his company’s violations of the Exchange Act’s books-and-records and internal-accounting-controls provisions. The allegations included labeling bribes as legitimate business expenses, coaching an employee to undermine an audit, using false receipts, including false expenses in financial statements, approving a false reimbursement, and approving expenses for cash payments and “red envelopes” given to government officials.

Finally, the court held that the SEC adequately alleged violations of Section 13(b)(5) and Rule 13b2-1, which prohibit knowingly circumventing or failing to implement internal accounting controls and falsifying, or causing the falsification of, company books, records, or accounts.

Permanent injunction

The court found a permanent injunction appropriate because the SEC’s materials indicated that Li orchestrated a scheme involving bribes, falsified expense reports, and efforts to circumvent accounting controls. The court also noted that Li had not acknowledged misconduct or assured the court that he would avoid future violations.

Civil penalties

The court determined that no separate damages hearing was necessary because the SEC substantiated its request with affidavits and documentary evidence. It imposed a Tier II civil penalty of $550,092. The amount included $80,000 each for a false expense report and a false certification of a 2014 SEC filing, and $97,523 each for endorsing a false audit report, submitting false certifications for 2015 and 2016 SEC filings, and giving false testimony to the SEC in 2016.

Ruling

Judge J. Paul Oetken granted the SEC’s motion for default judgment. The court granted the requested relief in full, permanently enjoined Li and specified people acting with him from violating or aiding and abetting violations of the identified Exchange Act provisions and Rule 13b2-1, ordered Li to pay $550,092 in civil monetary penalties, directed entry of judgment, and closed the case.